Renewable Energy Project

Elizabeth Lokey
Renewable Energy
Project Development
Under the Clean
Development
Mechanism
A Guide for Latin America
Renewable Energy Project
Development under the Clean
Development Mechanism
A Guide for Latin America
Elizabeth Lokey
London • Sterling, VA
First published by Earthscan in the UK and USA in 2009
Copyright © Elizabeth Marie Lokey, 2009
All rights reserved
ISBN: 978-1-84407-737-3
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Library of Congress Cataloging-in-Publication Data
Lokey, Elizabeth.
Renewable energy project development under the clean development mechanism :
a guide for Latin America / Elizabeth Lokey.
p. cm.
Includes bibliographical references ad index.
ISBN 978-1-84407-737-3 (hardback)
1. Renewable energy sources–Government policy–Latin America. I. Title.
TJ807.9.L29 L65 2009
333.79'4098–dc22
2008044614
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Contents
List of Figures and Tables v

Acknowledgements vii
Executive Summary ix
List of Acronyms and Abbreviations xi
Section 1 CDM Market and this Guide

Chapter 1 Background and Introduction 3
Section 2 Barriers
Chapter 2 Technical Barriers 43
Chapter 3 Social Barriers 65
Chapter 4 Financial Barriers 75
Chapter 5 Informational Barriers 87
Chapter 6 Host Country Institutional Barriers 101
Chapter 7 UNFCCC Procedural and Methodological Barriers 109
Chapter 8 Small-Scale Barriers 127
Section 3 Country Market Intelligence for CDM Projects

Chapter 9 Country-Specific Profiles Introduction 147
Chapter 10 Argentina 151
Chapter 11 Belize 159
Chapter 12 Bolivia 161

iv RENEWABLE ENERGY PROJECT DEVELOPMENT
Chapter 13 Brazil 169
Chapter 14 Chile 177
Chapter 15 Colombia 187
Chapter 16 Costa Rica 197
Chapter 17 Dominican Republic 207
Chapter 18 Ecuador 213
Chapter 19 El Salvador 223
Chapter 20 Guatemala 231
Chapter 21 Honduras 241
Chapter 22 Mexico 251
Chapter 23 Nicaragua 265
Chapter 24 Panama 271
Chapter 25 Peru 279
Chapter 26 Uruguay 289
Chapter 27 Other Latin American Countries 297
Chapter 28 Regional Trends 303
Section 4 Future Development

Chapter 29 Stimulating Investment and Overcoming CDM Barriers 319
Chapter 30 Summary of CDM Barriers 329
Index 337
List of Figures and Tables
Figures
1.1 CER distribution by project type 9
1.2 CDM projects registered by type 10
1.3 CDM project cycle 13
1.4 Global distribution of CDM projects 16
1.5 Global distribution of CERs 16
1.6 Distribution of CERs by country in Latin America 17
1.7 Distribution of CERs generated by 2012 by type in Latin America 18
1.8 CERs derived from various renewable energy projects in
Latin America 18
1.9 CDM renewable energy project distribution in Latin America 19
2.1 Hurricane damaged pipe for hydro electric 45
2.2 La Joya site III biodigester in Puebla, Mexico 56
7.1 CERs predicted without industrial gas inclusion 110
10.1 Projects registered or in validation in Argentina 154
12.1 Projects registered or in validation in Bolivia 162
13.1 Projects registered or in validation in Brazil 171
14.1 Projects registered or in validation in Chile 180
15.1 Projects registered or in validation in Colombia 189
16.1 Projects registered or in validation in Costa Rica 200
17.1 Projects registered or in validation in the Dominican Republic 209
18.1 Projects registered or in validation in Ecuador 217
19.1 Projects registered or in validation in El Salvador 225
20.1 Projects registered or in validation in Guatemala 233
21.1 Projects registered or in validation in Honduras 244
22.1 Projects registered or in validation in Mexico 255
23.1 Projects registered or in validation in Nicaragua 267
24.1 Projects registered or in validation in Panama 274
25.1 Projects registered or in validation in Peru 282
26.1 Projects registered or in validation in Uruguay 291
vi RENEWABLE ENERGY PROJECT DEVELOPMENT
Tables
1.1 Renewable energy CDM projects registered or in the process of
validation 24
4.1 Investment and average generation costs for various energy
technologies 76
4.2 Incremental impact of the CER price on the internal rate of
return of the project (percentage per purchase period) 79
5.1 Major renewable energy associations in region 94
6.1 Point Carbon’s international CDM host country rating 101
6.2 Latin America’s top rated countries for CDM investment rated
by the German Office of Foreign Trade 102
13.1 Summary of Brazilian renewable energy mandate (PROINFA) 171
18.1 Feed-in tariff prices 216
28.1 Non-technical electrical losses before and after privatization 303
28.2 Privatization schemes in select countries 304
28.3 Summary of renewable energy legislation 305
28.4 The role and participation of DNA Offices in Latin American
countries 313
30.1 Technical barriers 330
30.2 Social barriers 331
30.3 Financial barriers 331
30.4 Informational barriers 331
30.5 Host country institutional barriers 331
30.6 UNFCCC procedural and methodological barriers 332
30.7 Small scale barriers 332
30.8 Country comparisons: Summary 333
30.9 Solutions for project developers 334
30.10 Solutions for host country governments / DNA offices 334
30.11 Solutions for the UNFCCC 335
Acknowledgements
I could not have completed this research without the cooperation, time and
hospitality of the hundreds of people in the 12 Latin American countries that I
visited. Their willingness to share insights, anecdotes, contacts and documents
made the content in this book come alive for me and, hopefully, for the readers
too.
I would like to thank a few people in particular. Thank you to Frank
Barnes, my primary PhD adviser, whose intellectual curiosity and constant
willingness to rise to a new challenge inspired me, and whose practical
guidance led me on a weekly basis to always contemplate the larger impacts of
my research. I appreciate my dissertation committee for giving me the flexibil-
ity to complete this multidisciplinary research in the emerging field of carbon
markets. Ilan Kelman of the Center for International Climate and
Environmental Research in Norway was a tremendous help in reviewing this
work. Debora Ley of Oxford University was instrumental in reviewing this
book and providing me with contacts throughout Mexico and Central America
viii RENEWABLE ENERGY PROJECT DEVELOPMENT
that helped me have successful interviews. Manuel Estrada, a private CDM

consultant in Mexico City, helped provide guidance on CDM-specific
questions. Gerardo Salgado introduced me to the world of CDM in Honduras.
A host of other friends including Victoria Frías, Eduardo Meléndez, José Maria
Meléndez, Mark Feldman, Richard and Vivian Clinton, Sergio and Jessica
Garcia, Camilo Garizábal Carmona and Carlos Andres Uribe were instrumen-
tal in the creation of this book as they hosted me during my field research.
Finally, I must thank my parents for their huge investment in and support
of my education from its start to finish. Without their sound advice and urging
to follow my dreams, I would not have been able to complete my final chapter
of learning and completion of this book.
Executive Summary
The Clean Development Mechanism (CDM) allows Annex I countries that

have ratified the Kyoto Protocol and must meet greenhouse gas reduction
targets to do so in part by purchasing emission reductions from projects regis-
tered with the United Nations Framework Convention on Climate Change
(UNFCCC) in developing countries. These projects, in theory, result in
additional emission reductions that would not have occurred otherwise
because they rely on the CDM revenues for their existence. The goals of the
CDM are to reduce greenhouse gas emissions in the most economical way
possible and promote sustainable development. Thus far, the bulk of these
emission reductions come from industrial gas mitigation projects. For success-
ful renewable energy CDM project registration and emission reduction
issuance into the future, the project must overcome a variety of political,
economic, social and technical barriers. This guide seeks to make these barriers
to renewable energy projects in Latin America more well known as a first step
towards better achieving the CDM goal of promoting sustainable develop-
ment. Some solutions are presented, but this section is limited as a full
discussion of these solutions merits another book altogether.
The two most important barriers to project development are politically and
bureaucratically related. The first major barrier to CDM project entry in a
given country is related to the openness of its electrical sector. Fully privatized
electrical sectors are more receptive to Independent Power Producer (IPP)
participation. This IPP involvement is necessary because state-run utilities have
little incentive to and in some cases cannot by law implement CDM projects.
State-run utilities are bound to develop the least-cost project, which, by defini-
tion, cannot be a CDM project since it must rely on the emission reduction
revenues for its existence. These emission reduction revenues are so new and
risky since they must be successfully registered with the UNFCCC that they are
not incorporated in state utility least-cost planning processes. Therefore,
countries with open electrical sectors that allow IPPs to develop CDM projects
typically have the most CDM renewable energy development.
The second major CDM barrier is that countries with strong renewable
energy incentives or mandates are at a disadvantage since, for CDM registra-
tion, projects must be additional to what would have occurred otherwise. If a
project that is applying for CDM registration helps fill a renewable energy
x RENEWABLE ENERGY PROJECT DEVELOPMENT
mandate, then its regulatory additionality is put in question. Likewise, if a

feed-in tariff for renewable energy makes a project financially viable, then its
financial additionality is negated. The CDM Executive Board’s silence on this
important issue of additionality has created a perverse incentive for developing
countries to do nothing to address climate change. These and a host of other
types of barriers are explained in this book.
List of Acronyms and
Abbreviations
AAU Assigned Amount Unit

AM Approved Methodology
CAF Corporación Andina de Fomento
CD4CDM Capacity Development for the CDM
CDM Clean Development Mechanism
CER Certified Emission Reduction
CERUPT Certified Emission Reduction Unit Procurement Tender
CFE Comisión Federal de Electricidad
CIF Climate Investment Fund
DNA Designated National Authority
DNV Det Norske Veritas
DOE Designated Operational Entity
EB Executive Board
EIS Environmental Impact Statement
EPM Empresas Públicas de Medillín
ERPA Emission Reduction Purchase Agreement
ERU Emission Reduction Unit
ETS European Trading Scheme
EU European Union
EUA European Union Allowance
GEF Global Environment Fund
HFC hydrofluorocarbon
ICE Instituto Costarricense de Electricidad
IPP independent power producer
JI Joint Implementation
kW kilowatt
kWh kilowatt hour
MW megawatt
MWh megawatt hour
NGO non-governmental organization
NREL National Renewable Energy Laboratory
ODA Official Development Assistance
xii RENEWABLE ENERGY PROJECT DEVELOPMENT
OECD Organisation for Economic Co-operation and Development

PCF Prototype Carbon Fund
PDD Project Design Document
PIN Project Idea Note
PoA Programme of Activities
PPA Power Purchase Agreement
PTC production tax credit
PV photovoltaic
SEECI Sustainable Energy and Climate Change Initiative
UN United Nations
UNDP United Nations Development Programme
UNEP United Nations Environment Programme
UNFCCC United Nations Framework Convention on Climate Change
VER Verified Voluntary Emission Reduction
Section 1
CDM Market and this Guide
1
Background and Introduction
Background
In order to address climate change, the United Nations formed the Framework
Convention on Climate Change (UNFCCC) in the early 1990s. Most countries
signed this treaty and pledged to consider reducing climate change and its
impacts. The 1997 Kyoto Protocol, which calls for binding emission reduction
targets for most developed countries – termed Annex I countries by the
Protocol – was created as an extension of this treaty. The Protocol was to go
into effect when 55 countries representing 55 per cent of the world’s green-
house gas emissions had ratified it. The 55-country clause was met by 2002,
but it was not until February of 2005, three months after Russia signed the
Protocol, that the 55 per cent of the world’s emissions stipulation was met. The
Protocol’s time frame is 2008–2012 for the 175 countries that had ratified it by
April of 2008 [1].
Flexible mechanisms within the Kyoto Protocol allow countries to fulfil a
portion of their carbon obligations by trading emission allowances known as
Assigned Amount Units (AAUs) among Annex I countries, purchasing emission
reductions from carbon offset projects in other developed countries or
economies-in-transition like the former Soviet republics or purchasing
Certified Emission Reductions (CERs) from carbon offset projects in develop-
ing countries. The latter of these options, known as the Clean Development
Mechanism (CDM), defined in Article 12 of the Kyoto Protocol, and overseen
by the UNFCCC, is intended to allow countries that ratified the Kyoto
Protocol to meet their carbon obligations in the cheapest way possible, achieve
the objectives of the Protocol and promote sustainable development, which is
contentious because it has not been defined by the UNFCCC [2].
Providing an alternative path to development for non-Annex I or develop-
ing countries is essential to curbing global warming since 59 per cent of
energy-related carbon dioxide (CO2) emissions will come from developing
countries in 2030 [3]. CDM projects absorb CO2 from the atmosphere or
decrease CO2 emissions by improving the efficiency of a process, fuel switching
4 CDM MARKET AND THIS GUIDE
or substituting fossil fuel-based energy with renewable energy. If the CDM

project is successfully registered and the emission reductions verified, the
emissions reduced or absorbed can be sold internationally to the Annex I
countries and provide additional revenues for the project owner.
The more emissions are reduced, the larger the profits from the project.
The process by which projects are registered is essentially the same for both
large and small projects and quite costly at between $58,400 and $500,000 [4
and 5].1 Therefore, most emission reductions are derived from large projects
such as industrial gas emission mitigation in urban areas. These projects have
potentially large revenue streams and can attract foreign investment and inter-
est from project developers and carbon brokers, who buy reductions from
project owners and sell them to Annex I countries.
Renewable energy projects tend to result in fewer emission reductions per
project and therefore only account for 12 per cent of CERs produced world-
wide, while industrial gas mitigation projects account for 72 per cent [6]. In
order to allow developers to have greater success in implementing these
projects, this book seeks to make these barriers to renewable energy CDM
projects better known. This geographic area was chosen because it has been
overshadowed by Asia, and there is no major study that assesses the region’s
barriers. Some recommendations for how to overcome these barriers will also
be offered, but less emphasis is placed on these suggestions since a full elabora-
tion of the potentials and pitfalls of each would constitute another book.
The author researched these barriers not only by reviewing the current
literature available, electrical background for each country and renewable
energy legislation in each country, but also by visiting 12 Latin American
countries and conducting interviews with project developers, governmental
and non-governmental organization (NGO) representatives, and investors. She
also visited 15 project sites during her travels to observe first-hand the barriers
to project implementation. See Appendices A and B for a complete list of inter-
viewed persons and project sites visited.
It is important to assess the project-specific barriers, as well as the host
country environment for implementing CDM projects, since the process for
registering and continually earning CERs is interdisciplinary and includes all of
these factors. The document used for registration of these projects with the
UNFCCC, known as the Project Design Document (PDD), must discuss the
technical aspects of the project, the renewable energy legislation and energy
situation in the country, provide an argument of why the project would not
have occurred in a business-as-usual situation based on a financial or barriers
analysis, show the baseline emissions that would have occurred without the
project, emission reductions as a result of the project, the environmental
impacts of the project and a stakeholder analysis of the project with commu-
nity members. The process of UNFCCC registration is interdisciplinary
because the success of renewable energy projects depends on social, political,
economic and technical aspects of the project being well aligned. Therefore,
this book is also interdisciplinary and seeks to address each of these compo-
BACKGROUND AND INTRODUCTION 5
nents in order to provide a thorough analysis of the barriers to CDM project

success.
The appeal of this book is wider than may first appear since virtually all
new renewable energy projects in developing countries are now considering the
CDM for their project. In a few rare cases, a project developer will not
complete the CDM project cycle because it seems too costly or burdensome.
However, as the price of CO2 pollution permits has increased in the second
phase of the European Union Emission Trading Scheme (EU ETS), there is
increasing interest in how to capture these revenues.
This book is an essential contribution to the literature since it is the first
on-the-ground analysis of CDM barriers in the region and the most up-to-date
and comprehensive work of its type. This analysis has the potential not only to
help current Kyoto Annex I countries meet their reduction targets through
better utilization of the CDM in Latin America, but also to highlight lessons
learned that will help guide US negotiations for offset inclusion in future green-
house gas legislation. The US will most likely incorporate offsets in its future
legislation in some way since they have the potential to greatly reduce compli-
ance costs; by the year 2050, the price of carbon mitigation per tonne would be
$220 without offsets and $50 per tonne with the use of unlimited offsets [7].
Clean Development Mechanism market

In order to understand the barriers to renewable energy project implementa-
tion, it is essential to understand the CDM market. Since its inception in 2001,
when the rules were finalized at the seventh Conference of Parties in the
Marrakesh Accords, until May of 2008, the CDM market has matured, with
exponential growth from 2006 to 2008 [8]; there were just 181 registered
projects in May 2006 and by April 2008 over 1000 existed [9]. In 2007, the
CDM generated $12.8 billion of the estimated $64 billion in the overall global
carbon market [10]. This market could grow six to eight times by the end of
the 2012 commitment period [11]. CDM projects have generated 45 million
CERs, which each represent the mitigation of one metric tonne of CO2 [12].
The value of CERs varies widely. The primary reason for this fluctuation is
the nature of the nascent carbon market, which is most developed in Europe.
Within the Kyoto Protocol, groups of countries were allowed to create regional
markets to make reductions. The European Union (EU) chose to do this and
created the European Trading Scheme (ETS), which is a cap-and-trade system
whereby polluters can trade allowances with other EU countries to reach
overall Kyoto country-based emission targets. The ETS has two compliance
periods, 2005–2007 and 2008–2012. At the end of each, the entities that the
ETS regulates, power and heat generators and selected industrial sectors, must
fulfil their carbon reduction goals [13].2 Governmental officials known as the
Designated National Authority (DNA) within each country decide how to
divvy up the total allowances of the country [14]. In the EU 45 per cent of
reductions are made within capped sectors and the ETS, 55 per cent are made
from activities outside of the cap. Allowance prices started at close to €18 per
tonne of CO2 and then soared to €30 per tonne of CO2 in May of 2006 [15].
However, EU Allowances (EUA) prices for the 2005–2007 period dropped to
just €0.1 per tonne of CO2 towards the end of 2006 and 2007 because of an
over-allocation of allowances. Allowances were given before country baseline
studies were completed and not appropriately distributed [16 and 17].
A linking directive set up through the EU allows CERs to count as EUAs for
compliance purposes [18]. In addition to being accepted in the EU, CERs are
accepted in Japan and Canada as emission reduction units for obligated parties.
Japanese buyers tend to be conservative in that they do not wait to see what the
carbon market will do, but instead want to make sure they have enough CERs
to cover demand and lock in prices for forward streams of CERs. Canada has
been slow to be involved in the CDM even though the country’s rules permit
CERs to make up 10 per cent of the country’s reductions [19].
CER prices are generally about one-third lower than EUAs because of the
project risk involved [20]. Prior to the EU ETS coming online and the Kyoto
Protocol being operational, few CDM projects were established, and CERs
were bought and sold for speculative future compliance purposes. In 2004,
before the Kyoto Protocol had come into effect, CERs were worth much less
than they are now; renewable energy projects earned €5.5 per tonne of CO2,
while the CERs from fuel switching and methane recovery only earned €3.3 per
tonne of CO2 since they were questionable in their support of sustainable
development [20]. In the spring of 2007, registered projects that were not yet
running could earn €8–11, and CERs issued for existing projects were earning
€10–12 per tonne of CO2 [21]. In April of 2008, CERs went up in value
because the EUA of the second compliance period of the ETS commanded a
higher price. As of March 2008, CERs from registered projects were being sold
for close to €16 per tonne of CO2 [22].
Project owners can decide when to sell the CERs, choosing to sell them
early as a future stream of offsets that will be generated or holding onto them
in hopes that the market price for them will increase [23]. The amount of risk
associated with projects and how far advanced the project is in the CDM
project cycle determines the exact CER price that buyers and sellers negotiate.
Forward-purchased CERs for medium-risk projects earned, in the spring of
2007, €5–6 per tonne of CO2 while forward-purchased, low-risk projects
earned €7–8. Each CER transaction fetches a unique price that is determined
by the amount of project risk, the degree to which the project fulfils the goal of
sustainable development, and the current price of European Union Allowances
(EUAs), which are tradable within the EU boundaries [3].
Often renewable energy project owners do not understand how and why
CER prices for distinct projects and different compliance periods vary. It is
therefore difficult for them to predict how CERs will affect their project
profits. They also do not have the connections to sell the CERs on the inter-
national market to those generators that need them for compliance purposes.
For these reasons, project owners usually contract carbon brokers to handle
these transactions. Because the carbon broker tries to make money on the
spread between the purchase and sale price of the CER, the carbon broker does
not pay the project owner the full market value of the CER [21].
This type of transaction of CERs through a carbon broker is known as the
secondary CER market. The secondary CER market grew rapidly in 2006. This
market consists of a third party carbon consultant such as Ecosecurities or
Evolution Markets buying CERs from project owners and then reselling them
to buyers. The third party takes on all of the risk for not delivering the CERs.
Usually, this entity has a contract for delivery of CERs and buys extra CERs
just in case those CERs are not all delivered. The price that the project owner
can obtain is usually less than what he would receive if he were to negotiate
directly with a buyer. The third party can then sometimes sell the CERs for
more than the average CER price. Secondary CER prices were $10.75–$27 for
2005–2006 [24].
Since CDM projects last for either two ten-year periods or three seven-year
periods, brokers negotiate prices now that will last well into the next Kyoto
compliance period and beyond 2012 when the Protocol ends and future carbon
regulations have not yet been set [25 and 21]. Just as CER prices are linked to
the EUA price, the EUA can also be affected by the number of CERs on the
market. Chinese CER owners tend to sell CERs as a forward stream for seven
to ten years and can flood the market with the creation of large projects, lower-
ing the price of CERs [26].
The future CDM market is difficult to predict for several reasons. In 2005,
emission reductions needed annually for all Annex I countries to fulfil their
carbon obligations by 2012 were 1.3 Giga tonnes of CO2. However, estimates
predicted that this number could grow threefold if the US and Australia joined
the Protocol, and Australia has begun to fulfil this demand prediction since it
ratified the Protocol in December of 2007. Also, several countries with
economies in transition in Eastern Europe were given AAUs based on a
baseline year of emissions that was extraordinarily high. Therefore, these
countries have extra allowances (known as ‘hot air’). Flooding the market with
these allowances would cause the price of CERs to fall dramatically [27].
Adding to the uncertainty for CER demand is the fact that the amount of
CERs that can be purchased to fulfil a country’s obligations, known as the
supplementary amount, averages 13.5 per cent in the EU. Each country has its
own supplementary clause, which ranges from a very low percentage up to 20
per cent in Spain [28]. Canada has set its supplementary clause at 10 per cent
of overall reductions. All of these percentages are low compared to the initial
EU linking directive that allowed CERs to be counted, as EUAs called for 50
per cent [29 and 30]. A careful analysis of CER future gluts or shortages would
need to consider each supplementary amount.
The uncertainty in the post-2012 Kyoto rules has caused the future demand
and price for CERs to be difficult to predict. The 13th Conference of Parties in
Bali in December of 2007, where current and future climate change legislation
was discussed by those who ratified the protocol and official observers, set forth
a ‘Bali Road Map’ with a ‘Bali Action Plan’, which provided the framework for
creating a new negotiation process to address climate change [31]. This process
should be finished in 2009. Regardless of what happens with international
negotiations, the EU recently announced that it will value allowances and CERs
from 2013 to 2020 in Phase III of its trading scheme, but the Phase III draft rules
limit the ability of CERs to fulfil reduction targets if the host country for the
project-based emission offsets does not have binding target reductions. This
provision essentially prevents CDM from growing post-2012 since few develop-
ing countries have taken on binding reduction targets. Despite this negative
forecast, market participants are optimistically vying for the ability to cover
more reduction obligations through CERs during this time frame [32]. The
global community has not yet decided if Kyoto or another carbon market will
exist [33]. The World Bank and a few carbon brokers like Ecoinvest are buying
CERs from projects generated after 2012 for the low price of $4/tonne of CO2
[34 and 21]. Given this uncertainty, there could be a decrease in CDM projects
in the coming years since CDM projects create revenues for between 7 and 30
years in the future.3
Industrial gas project impact

In general, emission reductions derived from renewable energy projects are
overshadowed by the large, industrial gas mitigation projects that now
dominate the market. (See Figure 1.1 for the distribution of CERs by Project
Type.) In May of 2007, 40 per cent of CERs generated came from just 10 of the
633 registered CDM projects, while the 384 renewable energy projects make
up only 18 per cent of the overall emissions reductions produced [12]. These
ten projects are all large, industrial emission mitigation from factories, which
are mostly located in Asia [2]. The greenhouse gases mitigated from these
factories, that create refrigerants, nylon and PTFE or Teflon, include hydroflu-
orocarbon-23 (HFC-23) and nitrous oxide (N2O) [2]. These gases are potent
and generate a large number of CERs since the reductions are distributed on a
CO2-equivalence basis; one tonne of HFC-23 equals 14,800 tonnes of CO2 and
one tonne of N2O has the warming potential of 310 tonnes of CO2 [35 and
36]. Also, these reductions can be made cheaply since the pollution occurs at a
limited number of factories and can be reduced through the utilization of
technology already in use in developed countries [2]. At the July 2006 market
price for CERs of €9/tonne CO2, refrigerant factories that emit HFC-23 earned
twice as much per kilogram for their pollution mitigation as they did per
kilogram of product they produced [2]. This high price for the pollution
mitigated means that the Annex I nations will annually pay between €250 and
€750 per tonne to abate 67 per cent of the HFC-23 emissions; installing the
equipment to eliminate 100 per cent of these emissions in developing countries
would only cost $31 million per year [2].
Because few projects can dominate the CDM market at this juncture, it
makes sense to analyse project distribution by both CERs produced and by
project type. Global CER distribution by project type in Figure 1.1 clearly
shows how the industrial gas mitigation projects dominate the CDM market.
0%
1% 0%
6% 0%
HFCs and N2O reduction
9% Renewables
CH4 reduction and cement and coal mine/bed
Supply-side EE
Fuel switch
Demand-side EE
12%
Afforestation and reforestation
Transport
72%
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI
Pipeline Analysis and database, 1 April.
Figure 1.1 CER distribution by project type
Perhaps because of the questionable sustainable development benefits of

these projects, this reality is not highlighted on the UNFCCC website; instead
the CDM statistics portion of the site boasts the number and distribution of
CDM projects by type. Considering just project type distribution without any
regard to the number of emission reductions the project yields can be mislead-
ing since renewables made up 62 per cent of the projects registered and N2O
and HFC-23 projects made up only 2 per cent of the projects in April of 2008
[6]. Taking into account projects registered can give one an understanding of
the amount of technology transfer that is occurring, but this indicator alone is
not enough to get an accurate picture of the overall market. See Figure 1.2 for a
global distribution of CDM projects by type.
While more is being paid for emissions reductions from industrial gas
mitigation projects than would have been necessary to simply install abatement
equipment, the reductions from these projects are additional as they were not
controlled under developing countries’ pollution regulations prior to the imple-
mentation of CDM. Also, these projects are able to make reductions at the
cheapest price. However, they do not, according to many critics, fulfil the
Kyoto goal of promoting economically and culturally sustainable development
since they support factories that would exist without these carbon revenues
[37]. Critics like the Gold Standard, a CDM certification body, argue that these
projects do not promote sustainable development since they support existing
industries that rely on non-renewable fuels and raw materials. The Gold
Standard recognizes only energy efficiency and renewable energy projects as
valid offset projects. An NGO called CDM Watch urges the rule makers to ban
2% 1%
5% 0%
Renewables
3%
CH4 reduction and cement and coal mine/bed
Supply-side EE
10%
Fuel switch
Demand-side EE
Transport
17%
62%
Pipeline Analysis and database, 1 April
Figure 1.2 CDM projects registered by type
these types of projects from the post-2012 Kyoto rules [38 and 39]. However,
because the UNFCCC has not clearly defined sustainable development, these
projects qualify under the current rules. The allocation of CERs for industrial
projects has raised such controversy that it made the front page of the New
York Times on 21 December 2006 [40].
The current definition of sustainable development is ‘development which
meets the needs of current generations without compromising the ability of
future generations to meet their own needs’ and was published by the
Brundtland Commission in 1987 and proposed at the United Nations
Conference on Environment and Development in Rio de Janeiro in 1992. This
definition is vague as it does not provide guidance on how many cultural,
economic or environmental factors should be considered in order for future
generations to meet their needs [41]. As a result, each non-Annex I CDM host
country makes its own determination on what qualifies as sustainable. The
Chinese government has begun to show preference for energy efficiency and
renewable energy projects that fulfil sustainable development goals by taking
65 per cent of the CERs generated from HFC projects and 35 per cent of those
from N2O projects [42]. The tax on renewable energy and energy efficiency
projects is only 2 per cent of the CERs generated [14]. As critics of the indus-
trial gas emission projects influence the UNFCCC’s future rules of what
qualifies as an offset, and most of the industrial gas mitigation projects have
already been completed, renewable energy and energy efficiency CDM projects
may become an increasingly important way for Annex I countries to fulfil their
carbon obligations.
After the low-hanging fruit of industrial gas mitigation projects has been
seized and no more factories exist for retrofitting, the price of CERs will be
driven up, making renewable energy projects more financially viable. Even
after the obvious large-scale renewable energy sites have been developed, the
number of small-scale renewable energy CDM projects that could be imple-
mented is virtually limitless since there are 1.6 billion people without electricity
that would be served by biomass and fossil fuel sources in the future if project
support from aid organizations and finance options like the CDM did not exist
[43]. Furthermore, European CER buyers are increasingly choosing to invest in
offset projects to hedge their risk against volatile ETS allowance prices [44 and
16]. This increased interest could pave the way for additional renewable energy
CDM development. However, numerous barriers are currently preventing this
development from occurring.
Overview of CDM project cycle

Many of the barriers to CDM project development exist because of bureau-
cratic obstacles in the project cycle of CER issuance. Therefore, it is essential to
understand the current process by which a project earns CERs. This section
will provide a broad overview of the CER issuance for all project sizes and the
following section will outline the differences between small- and large-scale
project cycles. An overview of the process, its prices and timing are provided in
Figure 1.3.
The CDM project cycle is usually completed by the project developer or a
carbon broker who is typically from an international energy or carbon consult-
ing firm. For simplicity, the author will refer to this entity as the carbon broker
in this section. The carbon broker may choose to receive a flat rate for the
services or deduct a portion of the project’s future emission reductions as
payment. The carbon broker has the option to first submit a Project Idea Note
(PIN) to the host country’s Designated National Authority (DNA), which
reviews the project and makes a determination of whether or not the project
contributes to sustainable development. The DNA then issues a ‘Letter of No
Objection’ to the project’s activities and the CDM project cycle continues to
the next step.
Then, the carbon broker creates a Project Design Document (PDD) outlin-
ing the project in detail, the expected emission offsets, a monitoring plan, an
environmental analysis and stakeholder comments. If the project is deemed
appropriate by the DNA, then a contracted Designated Operational Entity
(DOE) that has been certified by the UNFCCC to validate the methodology
selected for the project is tasked with inspecting the PDD and ensuring that it
meets the CDM project guidelines and is accurate. One of the key pieces of the
PDD is an additionality argument that explains how the project generates
additional offsets that would not otherwise occur. In other words, the project
must exist independently of financial incentives or environmental regulations
that would promote the construction of the project in a business-as-usual
scenario [45]. This requirement is known as additionality. Additionality can
either be proven on financial grounds or through a barrier analysis, which

shows how this project deviates from standard practices and overcomes
hurdles because of its first-of-a-kind nature.
After the PDD and project inspection, the DOE prepares a validation
report of his findings. Usually, several revisions of the PDD are necessary based
on the validation report findings. The PDD and often this validation report are
required for the national approval process. Therefore, these reports and any
ancillary required documents are sent to the host country’s DNA for review.
This entity decides, based on the country’s own definition, whether or not the
project fulfils sustainable development and approves or denies the project
accordingly.
Then the carbon broker and DOE submit the revised PDD and validation
report to the CDM Registration and Issuance Team, which is run by the
UNFCCC and formed in 2007 by the CDM Executive Board. The CDM
Executive Board oversees all CDM project activities and methodologies. If
accepted by the Registration and Issuance Team, the proposed activity
commences as a ‘registered’ project.
After one year of operation, another DOE from a different firm is
contracted to assess the baseline emissions and emission reduction calculations
to determine the amount of emissions that the construction of the project
avoids. The CERs generated for renewable energy projects are typically calcu-
lated by multiplying the capacity factor of the project by the emission factor of
the regional grid times the hours in a year. The performance of the project is
measured in terms of gases mitigated. Once the second DOE has verified the
emission reductions, he or she issues a request for certification to the Executive
Board. The Executive Board reviews the data gathered and then makes a deter-
mination about issuing CERs to the project [46]. This process is known as
verification and must occur annually for CER issuance to take place each year.
Both the PDD and validation reports are posted on the UNFCCC’s CDM
website and available for the public to view. Some projects that failed registra-
tion are also on this site with explanations for why the project failed. Because
of the complexity of the overall project cycle, most projects use carbon brokers
or project developers to navigate this process. See Figure 1.3 for a graphical
overview of the CDM project cycle, its timing and costs.
The overall process of getting CERs issued and verified annually costs
anywhere between $58,000 for a very simplified small-scale project and
$500,000 for a complex larger project [4 and 5]. CDM project costs include
project identification, PDD creation and validation, project monitoring,
DNA approval, registration, legal fees and carbon brokerage fees [27]. These
costs are higher if a new methodology must be written for a project. Carbon
funds like the Prototype Carbon Fund, which is organized by the World Bank
and funded by public and private investors, pick CDM projects to invest in
and sometimes have reduced transaction costs because they specialize in
certain project types and have a rubric of standard contracts and practices
[27].
Step in cycle $2–8000 Responsible entity

1–2 months
Project idea note (optional step)
$25–38,000 Project developer or

Project design 2–4 months carbon broker
document
Designated national
Approval
authority
$15–30,000
2–3 months Designated
Validation
operational entity
After the first crediting
period (7 or 10 years), $6000 and up
2–3 months Registration and
project owner must go Registration
issuance team
through project cycle
again to earn revenues
for next period Implementation Project owner
and monitoring
$7000 annually
1–2 months
Verification
Designated
operational entity
Certification
Registration and
Issuance of CER
issuance team
Legal fees
$23–38,000
Source: United Nations Environment Programme and Risø Centre (2004) CDM Information and Guidebook, 2nd
Edition, UNEP/Capacity Development for CDM, April 2008.
Figure 1.3 CDM project cycle
Small-scale renewable energy projects, defined by the UNFCCC as those

under 15MW, have a streamlined methodology that is meant to reduce transac-
tion costs, which constitute the biggest barrier to their implementation.
However, even with this streamlined methodology, these projects suffer from
having to complete almost all of the same steps as large-scale projects. The
overall process is almost as expensive while the number of CERs that can be
earned is limited. Therefore, carbon brokers are generally not interested in
these types of projects, and small-scale projects had only generated 6.4 per cent
of the overall CERs created from registered projects by April of 2008 [6]. The
details of the small-scale methodology, and challenges developers of this
project size face, will be described in more detail in Chapter 8, ‘Small-Scale
Barriers’.
Step-by-step guide
The complex CDM process can also be understood as a series of steps that
various entities must undertake. The section below describes the process in this
way.
Investors’ and project developer’s steps

1 Identify project opportunity.
2 Do initial financial analysis of project.
3 Contract carbon consultant or someone in-house to complete CDM paper-
work.
4 Work with carbon consultant to provide needed information.
5 Ensure that CDM registration is completed in tandem with project
construction so that project is registered before it begins generation.
6 Contract a Designated Operational Entity (DOE) to validate project after
Project Design Document (PDD) has been completed by carbon consultant.
The carbon consultant will contract the DOE if requested. Payment for
DOE services is decided in contract between carbon consultant and project
developer.
7 Assign someone to implement the monitoring plan to verify emission
reductions created.
8 Contract a separate Designated Operational Entity (DOE) (if large-scale
project) to complete annual verification of emission reductions.
9 If contracted to market and sell the CERs, then find a buyer and complete
transaction.
10 If three seven-year crediting periods are selected, begin the process of
contracting a carbon broker to complete new PDD after about five years of
operation.
Consultants’ steps
1 Conduct a feasibility study and/or PIN to assess project’s CDM potential.
2 Work closely with project developer to glean necessary system operating
information.
3 Make host country contacts with DNA office to determine if project fulfils
the goal of sustainable development. If the DNA believes that it fulfils this
criterion, then a Letter of Approval will be issued.
4 Make host country contact with grid information managers to get emission
data for baseline calculation.
5 Create additionality argument, baseline calculation, environmental impact
assessment, stakeholder analysis with community members and monitor-
ing plan for PDD.
6 Submit PDD to DOE for validation.
7 Work with DOE to complete revisions necessary to PDD.
8 Stay in close contact with UNFCCC Registration and Issuance Team to
follow the progress of the project and make any necessary revisions.
9 Be in contact with DOE that verifies emission reductions to be aware of

actual emission reductions generated.
10 If contracted for sale of CERs, sell them after they have been issued.
DNA steps
1 Assess PIN if submitted and issue Letter of No Objection if appropriate.
2 Consider project for fulfilment of sustainable development (based on fixed
or variable criteria) and issue Letter of Approval if appropriate.
UNFCCC steps
1 Registration and Issuance Team reviews PDD and validation report for
accuracy.
2 If a new methodology is proposed, the Methodology Panel and Executive
Board consider this new methodology for acceptance.
3 After project has operated for a year and created emission reductions, the
Registration and Issuance Team analyses the verification report and issues
CERs if deserved.
Current CDM landscape

General analysis
CDM projects are only successful in countries that already have financial and
political stability [47]. This stability can attract foreign investment and allows
locals to develop projects. Many of the project types that generate CERs for the
cheapest price, such as the aforementioned industrial gas emission mitigation,
methane capture from coal exploration, landfill gas capture and energy
efficiency upgrades are only suitable for countries that have large cities and have
achieved a high level of development. Countries like Colombia or sub-Saharan
Africa that are deemed undesirable for CDM development because of political
instability, inadequate domestic bureaucratic structures or a lack of low-cost
projects benefit from fewer CDM revenues [14]. Some countries’ innate ability
to be more suitable for projects than others, and low levels of governmental
corruption because of their level of development, skew the development funds
and benefits. This unequal distribution of projects has recently raised concerns
by CDM watch-groups. They contend that sustainable development is not being
shared equitably [48]. Even the UNFCCC has solicited comments on how to
improve the regional distribution of projects [49].
Latin America was slated to lead the CDM market because of its early
aggressive investment solicitation for CDM projects [50] and lead in setting up
DNA offices [33]. In 2003, Latin America dominated the CDM market with
66 per cent of the projects [51]. However, by May of 2007, Asia led the CDM
market, generating 84 per cent of total CER volumes. China alone captures 60
per cent of the world’s CDM activity [52]. This current distribution of the
market will most likely shift again towards Latin America since most of the
polluting factories in Asia have already been retrofitted with emission reduc-
Source: UNFCCC CDM (2008) Project’s Location: Interactive Map, 20 April, available from
http://cdm.unfccc.int/Projects/MapApp/index.html
Figure 1.4 Global distribution of CDM projects
tion equipment. See Figure 1.4 for a worldwide distribution of projects and
Figure 1.5 for the global distribution of CERs.
Within Latin America, project development follows the worldwide
patterns. Most of the projects have been implemented in urban areas and the
countries that have received more project development are those that are more
politically and economically stable. See Figure 1.6 for a distribution of projects
by country in Latin America.
Latin America, like the rest of the world, has a CER market that is
dominated by industrial gas emission reduction projects. However, these types
400,000
350,000
300,000
250,000
CERs issued
200,000
150,000
100,000
50,000
0
Latin Asia and Europe and Sub-Saharan North Africa
America Pacific Central Asia Africa and Middle East
Figure 1.5 Global distribution of CERs

7%
1%
1% Brazil
2% Mexico
3%
Chile
6% Argentina
Colombia
Peru
8% Guatemala
Honduras
Ecuador
Others
10%
45%
17%
Figure 1.6 Distribution of CERs by country in Latin America
of HFC and N2O emission reduction projects are less prevalent in Latin
America because there are fewer factories that release these emissions and
therefore fewer opportunities for reductions. Renewable energy, landfill gas
and agriculture projects make up the remaining large CER market opportuni-
ties. See Figure 1.7 for a distribution of CERs by project type in Latin
America.
As of February 2008, most of the CERs in the region were derived from
landfill gas, biomass and hydro projects. A handful of wind and no solar
projects exist in the region. See Figure 1.8 for a graphical representation of the
CERs derived from various renewable energy projects and Figure 1.9 for the
renewable energy project distribution in Latin America. A lack of project type
diversity points to another failure in the CDM as a wide variety of technology
transfer is not achieved. Technology transfer is an implicit, rather than a stated
goal of the CDM. It was highlighted as a deficiency in current CDM activities
at the Seminar of Governmental Experts in the tenth Conference of Parties
[53]. Also, PDD authors are required to ‘include a description of how environ-
mentally safe, sound technology, and know-how to be used is transferred to the
host Party(ies)’ in section A.4.3 [54]. According to a report prepared for the
UNFCCC in December of 2007, technology transfer was more likely to occur
in large projects that occurred in industrialized countries with international
partnerships for project development [55]. Clearly, these criteria can only
occur in specific instances and will not lead to an equitable distribution of
technology transfer.
1%
0%
2% 2%
12% Renewables
Landfill, etc.
36%
Agriculture
Fuel switch
Supply-side EE
Demand-side EE
19%
28%
Figure 1.7 Distribution of CERs generated by 2012 by type in Latin America
1%
0%
2% 2%
12% Renewables
Landfill, etc.
36%
Agriculture
Fuel switch
Supply-side EE
Demand-side EE
19%
28%
Figure 1.8 CERs derived from various renewable energy projects

in Latin America
28 4
Hydro
Biomass
65 134 Landfill gas
Non-landfill methane capture
(with the option for electrical production)
Wind
Geothermal
87
131
Figure 1.9 CDM renewable energy project distribution in Latin America
Project type analysis

It is important for the reader to have a brief knowledge of the landscape and
history of renewable energy in the region prior to analysing the distribution of
clean energy CDM projects. This background is key for consideration of
project additionality and barriers analysis. The clean energy mix of the region
was 72.8 per cent of overall generation in 2005. This generation is almost
exclusively hydro, which the region as a whole can support with its heavy
rainfall and diverse topography. However, many of the countries that rely
heavily on hydro generation, such as Costa Rica and Brazil, are growing to
fulfil demand with fossil fuel-intensive additions because of the high cost of
new hydro capacity additions [56]. Overall in the region, hydro is expected to
grow at 2.2 per cent annually while natural gas annual growth is predicted to
be 4.4 per cent [57].
The rest of this section briefly mentions the renewable energy CDM
projects that exist by type in the region to give the reader an idea of where the
CDM has had relative success. The current renewable energy projects in Latin
America that have received CDM revenues or are in the process of doing so
include generation from hydro, wind, geothermal, landfills, and biomass from
sugarcane production.
Hydro
The hydro industry dominates generation because this industry was already
well developed with both public and private sector generation facilities before
CDM revenues were available. Firms from around the world, like Enel of Italy,
owned hydro applications because of the ability to make a profit from this type
of generation. Estimated potential hydro resources are enormous because of

the abundant rainfall and mountains that traverse the region of both Central
and South America; Honduras alone estimates that there is 5000MW of devel-
opable potential in the country [58].
The prevalence of these projects before CDM revenues were available puts
into question the additionality of the projects. As each successive project is
developed, it becomes progressively more difficult to prove this additionality
since ensuring that the project is not financially feasible without CDM
revenues is necessary for qualification. Twenty per cent of the projects,
accounting for 15 per cent of the CERs that will be produced by 2012, in the
region are hydroelectrics, making them hard to prove additionality [59].
Additionality can be easier to show for a small hydro project. The smaller a
hydro project is, in general, the more difficult it is to make a profit since the
work necessary to procure generation and environmental permits, as well as
the CDM paperwork, is the same for all projects regardless of their size. For
that reason, some countries like Guatemala have laws that help promote small
hydro applications that are under 5MW. And, although these projects are
profitable, they are not without technical challenges that will be detailed in
Chapter 2, ‘Technical Barriers’.
Wind
Only one commercial wind farm in Costa Rica existed prior to the CDM. Now,
a handful of them have achieved registration in the region and more are on the
books. This rapid increase in development can be attributed to the rise in
importance of the CDM for project finances and/or the growth in the wind
industry.
Mexico has much activity in the wind sector. Its initial CDM project was
Bii Nee Stipa developed with Gamesa of Spain in December 2005 and February
2007. CEMEX and ACCIONA Energía have a bid for a 250MW wind farm
called EURUS. The state-run utility called CFE registered La Venta II in June
2007 and plans on developing La Venta III, IV, V and VI, which will each be
close to 100MW. Iberdrola got involved with La Ventosa in December 2007
[9]. A small Mexican independent power producer called Fuerza Eolica plans
to develop a 10MW farm on Baja California Norte y Sur [60].
The prospects for wind generation in Central America are limited. Only
one project in the region has successfully achieved CDM registration to this
point; the state-run utility of Costa Rica has registered La Tejona, a 19.8MW
farm [61]. There is also movement from Mesoamerica Energy to expand their
23MW Plantas Eólicas SRL site in Costa Rica and develop a 60MW site in
Honduras [62]. Jamaica and the Dominican Republic each have one CDM-
registered wind farm that is approximately 20MW. Panama has prospective
sites that have 12 months of wind, and interest from a few groups like Santa Fe
Energy with a bid for an 81MW farm [63]. Guatemala has limited excellent
sites for development, but Ecomino is aggressively moving towards developing
a 33MW project that they hope to expand to 120MW called Piedras Blancas in
the southwest of Guatemala [64]. Nicaragua has huge potential, but few devel-
opers are pursuing this market because of the country’s difficult climate for
investors. Central America is most hindered by participation in the current
market for wind generation because a global shortage of turbines has led to the
requirement of an order of several hundred MW in order to attract the atten-
tion of turbine manufacturers [65].
In South America, a small cooperative in the Patagonia region of Argentina
called Antonio Moran was the first to register a 10MW farm, in December
2005. Empresas Públicas de Medellín followed with the registration of a
19.5MW farm in Colombia in April 2006. Gamesa of Spain is interested in
developing a wind farm of 10MW in Uruguay for CDM. Now, Endesa has an
18MW farm that is under construction in Chile. Brazil has nine registered
projects and several more under construction because of its renewable energy
legislation, which will be discussed in more detail in the chapter on Brazil.
Geothermal
Within the geothermal sector, there are just two projects that have achieved
registration. San Jacinto in Nicaragua is registered for 66MW of generation.
With 10MW of this capacity installed and running and tests underway for the
34MW expansion, it is a success story thus far. The failed governmental appli-
cation of Momotombo gave this type of generation a bad reputation in
Nicaragua. Momotombo was overextracted in the late 1980s in a time of
capacity shortage, and water was not reinjected properly due to a poor under-
standing of aquifer currents. (A more detailed explanation of Momotombo is
described in Chapter 2.) San Jacinto’s success, however, could be an anomaly
instead of a trend setter in geothermal development because interested Russian
parties drilled several perforations, some of which the plant is now using for
steam extraction. These holes, which average $2 million each, are the largest
capital cost of the plant. Polaris, which developed San Jacinto, is currently
planning on developing another geothermal application in Nicaragua called La
Casita that will be 130MW [66].
There is also a CDM-registered project in El Salvador called Berlin
Geothermal Power Plant, which will expand a 66MW plant by 44MW. This
application, along with the 95MW Ahuachapan plant, makes El Salvador the
country with the most geothermal generation in the region; however, Costa
Rica and Guatemala have huge potential. In Costa Rica, the 162.5MW
Miravalles plants have been developed with the support of the state-run
energy company, but these plants did not earn CDM credit because most of
them were built before CDM came into effect in 2001. Another 35MW
geothermal plant called Las Pailas is scheduled to open in 2011 in Costa Rica
[67]. The state-run Costa Rican utility is studying a new deposit called Diquís
for extraction [68].
In Mexico, the state-run utility has a tender to develop a geothermal site
called Cerro Prieto [69]. In South America, there is much interest in geothermal
development even though there is not yet one commercialized plant. Isagen is
studying geothermal prospects in Colombia [70] and the Ministry of Energy

and Mines in Peru is planning a geothermal project [71].
Landfill gas
Within the landfill gas sector, few plants produce electricity; instead, they
simply flare the methane to create the less potent greenhouse gas of CO2. Also,
the relatively small size of the electrical applications that can be supported by
landfill gas makes them less appealing. Some entities, such as the University of
Antioquia and German Green Gas in Medellín, Colombia, have chosen to
simply flare emissions instead of attempt to produce electricity because of the
reduced complexity and lower capital costs [72].
Landfill gas projects have had the most success in the more developed
countries of the region such as Brazil, Chile, Argentina and Mexico that have
high concentrations of people. These countries have landfills that are not only
of a critical mass that is large enough to justify the project development costs,
but they also have landfills that are lined, have water extraction methods and
sorted trash.
Projects in areas that do not have these specifications have been less
successful. Río Azul Landfill in San José, Costa Rica, was planned for CDM
revenues from methane destruction in a turbogenerator for electrical produc-
tion and has completed the initial steps of the paperwork necessary with a
PDD. However, there are a variety of problems with its operation (that will be
described in detail in Chapter 2) [73]. Other sites like La Chureca in
Managua, Nicaragua, seem to have potential with 52 acres of 20 metres of
trash, but would be difficult to develop. Most dumps in Latin America like La
Chureca are unlined holes or piles where trash is not sorted before it is
deposited. Therefore, the organic matter available for methane production is
unpredictable. Also, approximately 1000 people live by scavenging the
remains of this landfill. Although it would seem as though these poor people
who live in shacks near the trash and cook by sticking a pipe directly into the
garbage to collect the methane would not carry much political weight, a
similar community blocked development of a site in Baranquilla, Colombia
[74]. Despite these challenges, two exploratory methane wells exist on site at
La Chureca in Managua [75].
Other methane capture

Brazil and Mexico dominate the landscape for these types of projects since they
both have agricultural industries that are large enough to produce a significant
amount of methane that can be flared for emission reductions and justify the
development costs for digesters. Brazil has 12 of these projects and Mexico
boasts 37, while no other country in the region has more than five. Other than
generating methane from farm animals, it can be created and mitigated from
industrial processes to produce liquor and beer. A few factories have begun
taking advantage of this source of reductions.
The future of these projects is uncertain since they have had a relatively
poor performance in Mexico. The details of the failures of these projects are
described in Chapter 2.
Biomass
The last area of renewable energy development for CDM revenues is the
conversion of biomass residue from the sugarcane plant into electricity.
Therefore, the countries like Brazil with large sugarcane crops are those that
have registered the most projects. Other industries that can capture this type of
energy include palm plantations, sawmills and other types of biomass. Most
sugarcane plants already auto supply by burning their crop residues to heat
water, produce steam and spin a turbine in a Rankine cycle plant. However,
many mill owners are earning CDM revenues by making these processes more
efficient and/or providing generation that can be sold back to the grid.
Currently these plants are just operational during the harvest when the residue
is available.
Owners have creatively begun to consider using the plant’s facilities and
already purchased equipment to supply electricity throughout the year by
purchasing biomass residue from nearby plantations of other crops. The trans-
port costs of accessing this other biomass and the higher cost of purchasing a
boiler that can accept other fuels are preventing the rapid development of this
type of CDM project from being immediately implemented [76]. Because of
these obstacles to generating power year-round with other biomass residues,
most plants that have achieved registration for this type of project have done so
by increasing plant efficiency without additional biomass inputs [61].
The large number of coffee farms in the region suggests that there are
opportunities within this sector for development of CDM activities. Coffee
farms can capture methane from the pulp and wastewater discarded. In Costa
Rica, the Dutch government sponsored nine of these projects as Activities
Implemented Jointly, the precursor of CDM [77]. However, the cost of the
systems was prohibitively expensive without a grant [78], and technical
problems led to project failures [79].
See Table 1.1 for a complete list of the CDM projects undergoing valid-
ation or already registered in the region as of 1 April 2008.
Introduction
Book organization
This book is divided into four sections: (1) introduction to the CDM market
and this guide; (2) barriers to project implementation; (3) country-specific
challenges and opportunities; and (4) solutions to CDM barriers and recom-
mendations for future work. This chapter (with this ‘Introduction’) constitutes
the first section and therefore does not need further explanation. The other
three sections are described below. Following a description of these sections, a
few key concepts used in this book are described.
Table 1.1 Renewable energy CDM projects registered or in the

process of validation
Country Hydro Wind Geothermal Landfill Non-landfill Biomass Total

methane methane
capture capture (with
option for
electrical
generation)
Argentina 1 1 0 9 1 6 18
Bolivia 3 0 0 1 1 0 5
Brazil 57 7 0 31 12 89 196
Chile 10 1 0 15 2 9 37
Colombia 6 1 0 6 2 2 17
Costa Rica 2 1 0 1 0 2 6
Cuba 0 0 0 3 0 0 3
Dominican
Republic 0 3 0 0 0 0 3
Ecuador 9 1 0 1 1 4 16
El Salvador 1 0 2 1 0 2 6
Guatemala 9 0 1 1 2 2 15
Guyana 0 0 0 0 0 1 1
Honduras 9 0 0 0 5 6 20
Jamaica 0 1 0 0 0 0 1
Mexico 4 10 0 14 37 2 67
Nicaragua 0 1 1 0 1 1 4
Panama 7 1 0 0 0 0 8
Paraguay 1 0 0 0 0 1 2
Peru 15 0 0 2 1 0 18
Uruguay 0 0 0 1 0 2 3
Total 134 28 4 86 65 129 446
Barriers section
The barriers section topically addresses technical, social, financial, informa-
tional, host country institutional, UNFCCC procedural and methodological
and small-scale project-specific challenges in individual chapters. Some of
these barriers are CDM-specific, and others are common to all renewable
energy projects. A short description of each of the types of barriers that are
encountered and a description of what is covered in the chapter are listed
below.
Technical
In this section, general technical barriers to project implementation, as well as
technology-specific challenges, are addressed.
Social
Using concrete experience from projects in Latin America, this chapter
addresses the social barriers that have prevented development or are currently
facing developers.
Financial
Receiving pre-investment funds, educating the bank about the value of CERs,
and gaining loans for the long-term renewable energy project investment are
obstacles that face project developers. Specific examples of financial struggles
and success stories will be presented in this chapter.
Informational
The lack of knowledge about or specific understanding of CDM opportunities
and Emission Reduction Purchase Agreements (ERPAs) can create insurmount-
able barriers for developers. The various agencies that have provided capacity
development, including the host country’s DNA office, are discussed.
Institutional
The degree to which the host country supports project development through its
laws and practices can create an environment that either promotes or hinders
these projects. Examples of how development is both facilitated and hindered
are presented.
UNFCCC procedural and methodological

The rules dictating how project developers earn CERs are complex and ever-
changing as methodologies evolve and are proposed. Barriers due to renewable
energy-specific methodologies are addressed.
Small scale
Projects less than 15MW face special challenges given the high transaction
costs in comparison to the number of CERs that can be generated. This section
explains the special streamlined methodology that exists for these projects and
points out examples of where small-scale projects are supported by Latin
governments and where they are indirectly discouraged because of existing
laws.
Country-specific section
The country-specific section addresses each country in Latin America, present-
ing its vital statistics for CDM development including the portfolio mix of the
grid, the country’s emission factor, the average price of electricity, whether or
not the market is privatized, if the country has capacity payments and a spot
market, and the names of the pertinent electricity-coordinating institutions to
provide a rough idea of the country’s suitability for CDM projects. Then in
each country-specific chapter, there is a discussion of the transition to a
privately operated electrical sector. Following this background information, a
description of current and pending renewable energy legislation and a CDM
portfolio of projects for each country are presented. Finally, country-specific
challenges and opportunities are addressed. This section systematically
addresses the quality of the DNA office, other domestic institutional support or
barriers that may exist, carbon broker offices and activity in the country,
renewable energy potential (if known), unique experiences that are pertinent to
only that country, and a summary of the country’s suitability for CDM renew-
able energy projects.
Some project-specific anecdotes will be found twice – in both the ‘Barriers’
chapters and the country-specific chapters. The information will be elaborated
in the area that it best fits. The point of mentioning the information twice is to
alert readers who use this book topically and others who search for country-
specific barriers.
Future developments
The third section of this book addresses solutions to overcoming each of these
CDM barriers. This section consists of a compilation and short discussion of
solutions proposed by the author and other analysts. Finally, a concluding
discussion will follow.
Definitional notes
Throughout this book, the author will refer to various players and markets in
the electrical sector. It is essential to define these entities now so as to prevent
confusion. The most common definitions of players and markets that exist are
defined here. If there is a country with a unique situation that deviates from
these definitions, it will be noted in the section in which it appears.
Market players
The entities most often mentioned will be industrial and residential customers
and those who control generation, transmission, distribution and retail sales.
In some countries discussed, these categories blend and can be owned by the
same company. However, these cases are rare as most Latin American countries
have privatized the electrical sector and now prevent vertical integration or the
ability of one company to own all stages of electrical generation, delivery and
sale to a customer. When vertical integration is permitted, it will be mentioned
as an exception to the rule.
When referring to generators, the author means those companies responsi-
ble for literally producing the electrons fed into the grid. By transmitters, the
author is referring to the company that handles long-distance transmission. In
most Latin American countries, the transmission grid has remained under state
control since it is a natural monopoly that does not lend itself well to competi-
tion. Sometimes these transmission companies are actually regionally based
organizations that cross country borders. By distribution company, the author is
describing the company that is responsible for operating and maintaining the
lower voltage system of electrical lines that serves customers after the electricity
has been sent over large distances through transmission. These distribution
companies often also sell the electricity to the end user. Confusion arises because
sometimes a separate retailer, instead of the distributor, handles the advertising,
branding, contract bundling and billing of the electricity to the customer even
though this entity does not physically deliver it to them [80 and 81].
Customers that are non-residential and consume more energy than the
residential designation are considered industrial consumers. The definition of a
‘large consumer’ is one that by law can negotiate directly with a generator to
structure a Power Purchase Agreement (PPA) or purchase wholesale electricity
through the spot market. The size of these customers varies by country.
Electrical markets
The electrical markets discussed throughout this book should also be briefly
defined to avoid confusion. Throughout the region of Latin America, a trend of
restructuring the electrical sector has occurred. This phenomenon also
occurred in the late 1990s in the US, but has now stopped after some states like
California suffered the ill effects of this change. For the purposes of this book,
the terms restructure, deregulate and privatize all refer to the same occurrence:
the shift from state-owned and operated utilities to privately owned ones as a
result of energy legislation. The reader will learn that the degree to which Latin
American countries choose to privatize their sectors varies and has profound
consequences for the country’s suitability to host renewable energy CDM
projects.
Variations on three models of market restructuring have been utilized in
Latin America. The first represents a high level of private sector integration
and consists of a competitive wholesale power market. A wholesale market
consists of generators, distributors, marketers and large consumers trading
electricity in spot transactions and long-term contracts. Both spot markets and
long-term contracts will be discussed in more detail below. Guatemala and
Chile are examples of highly privatized energy markets. The second model is
that of a single buyer of electricity in long-term contracts. Sixty-five per cent of
the countries in Latin America have implemented this type of wholesale
market. Honduras, Nicaragua and the large island countries of the Caribbean
are examples of this model, in which the former state-run utility acts as a single
buyer for long-term contracts. Finally, a vertically integrated monopoly model
entails the sale of electricity by independent power producers to the state-run
monopoly at avoided cost or a price determined by competitive bidding. Costa
Rica and Mexico have reformed their electrical sectors according to this hybrid
state–private model [82].
Appendix A: Interviewed persons

Country Company Contact Name
Mexico COMEX HYDRO Jacobo Mekler
DNV Gustavo Godínez
Terracarbon/Private Consultant Manuel Estrada Porrua
Ecosecurities Gabriel Quadri
Ecosecurities Mathieu Dumas
Ecosecurities Joaquin Pereyra
DNA Miguel Cervantes
AgCert Anon Martinez
AgCert Ignacio Castillo
AgCert Hector Galvadon
CEPAL Fernando Cuevas
CEPAL Debora Ley
Granjas Carroll Mexico Victor Ochoa
Granjas Carroll Mexico Leon Velario
Geosistemas Jorge Landa
Fuerza Eólica Pablo Gottfried
Fuerza Eólica Mario Gottfried
Sumitomo Hiroshi Ueda
CO2 Solutions Adrian Magaña Cervantes
Fondo Mexicano de Carbono – Bancomext Eugenio MacGregor
Fondo Mexicano de Carbono – Bancomext Marian Aguirre Nienau
ETEISA Francisco Marquez
Comision Regulatoria de Energía Francisco Barnes
CESPEDES representative Rosa Maria Jímenez
Dominican Instituto Dominicano de Desarrollo Mathilde Laval

Republic Integral Inc
El Salvador AEA – Alianza de Energía y Ambiente Otto Garcia
Universidad Centro Americana Simeon Cañas Ismael Sanchez
Guatemala Centro Guatemalteco de Producción más Limpia Maria Amalia Porta
Fundación Solar Marta Rivera
Fundación Solar Iván Azurdia
Fundación Solar Mario Hernandez
Guatemala Renewable Energy Generators Christhian Escobar
National Rural Electric Cooperative Association
(NRECA) Hugo Arriaza
MARN Raul Casteñeda
INDESA Rodrigo Erales
Ingenio Trinidad Victor Unda
Madre Selva Oscar Conde
Grupo Riviera Arturo Riviera
startup wind Lloyd Joongezon
Empacador Toledo Julio de la Parra
Ministerio de Energía Otto Ruiz
Honduras Former director of AHPPER+B20 Eda Zapata Cardona
Assessor of Special Projects Moises Starkman
Former DNA, now project developer Gerardo Salgado
Director of Energía, SERNA Marcos Flores
DNA Assistant Olga Aleman
Former DNA office employee Reinario Zepeda
AHPPER, INVERSA Elsia Paz
INCOMERH and ENERGIZA Carlos Bueso

ENEE - Head of Sustainable Development Glenda Castillo
3 Valles Sr Ramirez
Nicaragua Centro de Producción más Limpia Cesar Barahona
Director of Grupo Fenix Susan Kinne
Polaris Adriana Romero
Polaris Javier Dias
Polaris Manual Callejas
Polaris Jim Randle
Ministerio de Energía y Minas Miguel Barrios
Ramacafe Henry Hueck
UPANIC Manual Alvarez
DNA housed in MARENA Carlos Rivas
DNA housed in MARENA Ing Manual Madriz
ENEL Mario Torres
former DNA Marina Sthagtagen
UNDP Leoni Arguello
Ministerio de Energía y Minas Herminia Martinez
Ministerio de Energía y Minas Elieneth Lara
Ministerio de Energía y Minas Harold Sommerriba
EMCAMI Luis Lecayo
ECAMI Max Lecayo
Technosol Vladimir Delagneau
Costa Rica Biomass Users Network (BUN-CA) Jose Maria Blanco
E+CO/CAREC Fernando Alvarado
ACOPE Mario Alvarado
ICE Francisco Cordero
ICE Gravin Mayorga
Ecosecurities Mauricio Castro
Plantas Eólicas Jay Gallegos
Energía Global International Jorge Dengo
Mesoamerica Energy Allan Broide
DNA located in Instituto Meteorologico Nacional Paulo Manzo
DNA located in Instituto Meteorologico Nacional William Alpizar
Companía Nacional de Fuerza y Luz Walter Delgado
Ministerio de Ambiente y Energía Gloria Villa
SARET Ramon Samora
SARET Francisco Delgado
FEDEMUR Ileana Rojas
SARET Javier Sandoval
Private CDM Consultant Oscar Coto
Panama DNA – ANAM – Office of Cambio Climatico Zarati Cartin
DNA – ANAM – Office of Cambio Climatico Cheril Hernandez
ASEP – Asociación de Servicios Públicos Rafael de Gracia
Sicmar International Panama David Shaw
Santa Fe Energy Roberto Moreno
Comisión de Pólitica Energetica B77 Fernando Dias
ASEP – Asociación de Servicios Públicos Claudia Candanedo
Colombia Antioquia University Carlos Hildebrando Fonseca
Zarate
Antioquia University Carlos Andres Uribe
Institución de Planificación de Zonas Aisladas Edigson Pérez
CAF Marta Patricia Castillo
CAEMA Thomas Black
Ministerio de Minas y Energía Alonzo Cardonas
UPME Henry Josue Zapata

Comisión Regulatoria de Energía Gerson Castaneda Soto
DNA – Unidad de Cambio Climatico Paola Bettelli
DNA – Unidad de Cambio Climatico Andrea Garcia
DNA – Unidad de Cambio Climatico Sandra Graviator
DNA – Unidad de Cambio Climatico Roberto Esmeral
Fedepalma Laura Patricia Mantilla Soto
Interaseo Juan Gonzalez
Empresas Públicas de Medellín Ana Sandoval
Empresas Públicas de Medellín Fernando Colorado
Empresas Públicas de Medellín Jaime Aramburo
Empresas Públicas de Medellín Camilo Garizabal Carmona
Empresas Públicas de Medellín Carlos Enrique Velez Restrepo
Empresas Públicas de Medellín Olga Velez Arango
Empresas Públicas de Medellín Jorge Alonso Arboleda Gonzalez
MGM International Adriana Montoya
MGM International Mauricio Gonzalez
MGM International Margarita Cabrera
Ecuador Climate Focus Ines Manzano Dias
former CENACE Eduardo Melendez
Hidalgo e Hidalgo Sixto Durán-Ballén V.
Equigener Leonardo Duran
Unidad del Cambio Climatico Julio Cornejo
Alquimiatec Richard Zeller
Cordelim Ana Maria Núñez
Accion Ecológica David Reyes
Hidrovictoria Fernando Muñoz
Unidad de Gestion Ambiental Patricio Oliva
Unidad de Gestion Ambiental Alonso Romero Moreno
CONELEC Roberto Carrión
CENACE Max Molina Bustamente
Ecoelectric Jorge Chang Gomez
ERD Consultants (former Minister of Energy) Donald Castillo
Las Iguanas Landfill Guayaquil Andres Intriago
San Carlos Ingenio Almario Puga
San Carlos Ingenio Julio Hidalgo
Peru Visiting Professor CU Law School Armando Guevara
Redes Electricas Peruanas Vanessa Meza
Kennedy School of Public Policy Jorge Gastalumendi
Sociedad Peruana de Derecho Ambiental Bruno Monteferri Siles
Unidad de Cambio Climático y Calidad del Aire María Pilar Zevallos
Ministerio de Energía Maria Melindo
Ministerio de Energía Humberto Armas
Ministerio de Energía Juan Olazábal Reyes
FONAM David Garcia
CONAM Ricardo Gieseke
NorWind Jaime Barco-Roda
Paramonga Hugo Ayon
Santa Rosa Guillermo Cox Harmon
OSINERG Daniel Cámac Gutiérrez
former CONAM Patricia Iturregui
Intermediate Technology Group (Practical Action) Javier Coello
Bolivia CINER Alba Gamarra
CINER Sra Marikely Aguilar
Natsource Sr Ramiro Trujillo
Chile UN ECLAC Daniela Simioni

UN ECLAC Jose Javier Gomez
UN ECLAC Jose Luis Samaniego
CEPAL Eduardo Sanhueza
FIA Aquiles Neusadlfjwander
Hidromaule Jose Manuel
SolFocus Zack Bongiovanni
SolFocus Ty Jagerson
SolFocus Kelly Desy
SolFocus Nelson Stevens
Andes Energy Juan Guillermo Walker
ICEP International Manuel Madrid-Aris
Ecoingenieros Pablo Faundez Estevez
Info Carbon David Vargas Nunez
Furniture chile Francisco Torres
3C Francisco Avendano
3C Arturo Brandt
Sec of Energy Patricia Chotzen
Servicios Eólicos Juan Walker
PFAN Patrick D’Addario
World Bank – Carbon Finance Unit Pedro Huarte-Mendicoa
Laja Hydropower Pedro Matthei
Pacific Hydro Janine Hoey
UTEC Hector Miranda
Colbun Carlos Alberto Frias
CORFO Javier Garcia
Argentina Abo Wind Alejandro Tubal Garcia
MGM International Eduardo Piquero
Ecoinvest Alejandra Camara
Fondo Argentino de Carbono Sebastian Galbusera
DNA Eugenia Magnasco
INTA Ignacio Huerga
IMPSA Eduardo Guerra
Uruguay DNA Mariana Kasprzyk
MIEM Jorge Lepra
Ministerio de Energía Gerardo Triunfo
UTE Daniel Tasende
Dirección Nacional de Energía Daniel Larissa
Whole Region Organization of American States Mark Lambrides
A2G Francisco Avendano
Inter-American Development Bank Juan Pablo Bonilla
Ecosecurities Eron Bloomgarden
World Bank Chandra Shekhar Sinha
World Bank Edward Anderson
World Bank Fernando Cubillos
Ecoinvest Karla Canavan
Ecoinvest Christopher Salgado
The Gold Standard Jasmine Hyman
AgCert Dan Linsky
AgCert Hernan Mateus
SouthSouthNorth Alexandre d’Avignon
MSc Oxford/Japanese consultant Eisuke Kawano
Hamburg Institute of International Economics Axel Michaelowa
UN Consultant Debora Ley
Appendix B: Renewable energy sites visited

Country Company Project Name Project Type
Mexico AgCert Rancho Grande Sitio III Methane capture
Mexico AgCert La Joya Sitio III Methane capture
Mexico AgCert El Angelito/La Gloria Methane capture
Mexico AgCert La Cruz Sitio III Methane capture
Mexico AgCert Rastro Vargas Methane capture
Mexico Granjas Carroll Sites 15 and 6 Methane capture and
Mexico/Ecosecurities electrical generation
Mexico Granjas Carroll Site 11-3A Methane capture and
Mexico/Ecosecurities electrical generation
Honduras ENERGIZA La Coronado Hydro
Honduras INCOMERH La Babylonia Hydro
Nicaragua Municipality of La Chureca Landfill gas
Managua
Costa Rica SARET Río Azul Landfill gas
Colombia Green Gas/ University Curva de Rodas Landfill gas
of Antioquia
Ecuador Alquimiatec Zambizá Landfill gas
Ecuador Valdez/ Ecoelectric Valdez Sugarmill
Ecuador San Carlos San Carlos Sugarmill
Appendix C: Sample interview guide and questions

Guide for project developers
1 Please tell me the story of how you developed this project.
2 Why did you choose to develop this project?
3 Who are your clients for CERs?
4 What type of preference, if any, do your clients have for the type of CER
generated?
5 Do you require an upfront payment for the installation of equipment
and/or CDM project cycle work? Or, do you deduct these costs from future
CER revenues?
6 How is the validator chosen for your projects?
7 Who communicates with the CDM Executive Board during the CDM
project cycle?
8 When are the CERs delivered for this project?
9 How was the ERPA structured? (Did you engage in an ERPA for upfront
purchase of a forward stream of CERs for this project or will the CERs be
sold at a later date?)
10 How often do you do the PDD, project development and the purchase of
CERs from the seller for a project? Which of these steps did you do for this
project?
11 How do you entice project owners to stay with your company for all of
these steps? (Do you offer a discount for those projects where you do the
PDD and develop the project by installing the equipment?)
12 Who were your competitors for this project?
13 What are the biggest challenges you think you will tackle in this project?
14 How has your interaction with the DNA been? Has it provided you with
help or added delays to the project cycle?
Guide for project owners

1 Please tell me the story of how this project was developed.
2 How did you hear of CDM revenues?
3 Can you tell me about someone who has earned revenues? Do you know
someone who tried, but failed to earn the revenues? What was their
project?
4 Did you hire a carbon broker to help you through the project cycle?
Why or why not?
5 Did you consider doing the PDD yourself? Why or why not?
6 What are the predicted annual CDM revenues for this project?
7 Did you choose to do the ten-year crediting or seven-year crediting
periods? Why?
8 Will you plan on renewing the project by completing a new PDD after the
first crediting period? Why or why not?
9 Would you do the process yourself for the second period? Or, would you
hire the same firm to complete the project cycle for you?
10 Have you noticed that there are more projects like your own since the
CDM began?
11 Was the project begun before knowledge of CDM revenues?
12 Will you hire a lawyer to complete the ERPA if there is one for this project?
13 Are you relying on CDM revenues for any upfront project costs?
14 How much will CDM revenues add to your profit margin?
15 If the CDM revenues were not enough to make the project cycle worth-
while, how much more would they have to provide to make it so?
16 Did you have to pay any more to complete the CDM project cycle than
expected? In other words, did you have to pay any bribes to make the
project move along in the CDM cycle?
17 What are the biggest challenges to earning CDM revenues?
18 How will you ensure that the project performs each year?
19 Do you have someone on site who will be the technical support person for
the project?
20 How will new parts be ordered?
21 Do the local people benefit at all from the project? If so, how do they
benefit? How is this benefit measured? What do you use to determine the
amount of sustainable development provided?
Guide for Designated National Authorities

1 Please tell me how you became interested in the CDM and came to work in
this office.
2 How many people work in the office full time? Part time?
3 When was the office established?
4 How many applications has it handled?

5 How many successful projects have been approved?
6 How many projects have been turned down by this office? Why?
7 What does this office do (if anything) to promote projects?
8 Does the office have a website? What does it include? Who maintains it?
9 What type of financial or institutional support has the government
provided you thus far?
10 What do you wish that you had in terms of financial/institutional support?
11 What are the criteria used to establish sustainable development?
12 Does the country’s government take a percentage of CER revenues? Why
or why not? Does the percentage taken differ for project types?
13 Do you prefer to work with established foreign project developers or local
project developers?
14 Do you do site visits? Why or why not?
15 Do you provide feedback to the UNFCCC?
16 Are you audited to ensure that your definition of sustainable development
is applied consistently?
17 What kind of coordination is there within the governmental offices
between one ministry and the other on CDM projects? Do you receive help
and funding from other ministries?
18 To what degree does the work of the DNA fall in line with national devel-
opment plans? How many existing CDM projects are counted towards or
fulfil existing domestic energy programmes?
19 What is your definition of sustainable development? How strictly is this
definition enforced when deciding if a project will be accepted or not?
20 What are your thoughts on the whole CDM process? Is it too troublesome?
21 How could the CDM project cycle be made easier for the DNA?
Guide for Designated Operational Entities (DOEs)

1 Please tell me the story of how you came to be a DOE.
2 Describe the typical project site visit. Do project owners understand why
you are there?
3 Have you been offered a bribe to validate a project that was not
additional?
4 How do you advertise your services?
5 How do you compete with local and international entities?
6 What response have you gotten from the developers?
7 What barriers have you encountered as a DOE?
8 What would make the project cycle easier for you?
Questions for village residents, village owners, and NGOs

involved in programmatic CDM
1 Describe how this project came to be implemented in your village.
2 Do you like having the project? Does it make your life easier? How?
3 How do other villagers perceive the project?
4 Has the project created any difficulties for village residents?

5 Who is responsible for the maintenance of the project?
6 How will replacement parts be ordered?
7 Do you pay for your use of the energy?
8 Is the rate for energy flat or do you pay based on the amount you use?
9 Is the project owned by the town, a municipality or a private company?
10 Is the project paid for by a loan or grant? Will this loan be repaid in a
timely manner?
11 How are fees collected?
12 Who manages the fees?
13 How was the governance system for the management of the system
created?
14 Do you think it works well? How could it be improved?
15 Has this new governance for the system caused tension in the village?
16 Was an outside project developer involved with the installation of the
project?
17 Did that person or his colleagues provide technical training for the system?
18 Was there a feasibility study for the project?
19 Did community members help in the installation of the system?
20 Did village members pay a portion of the first costs of the system?
21 What is the geography of the area around the system?
22 Do you think the system is at risk of being destroyed by a hurricane,
mudslide, guerilla activity, a fire or other outside forces?
23 What measures were taken to protect the project from these risks?
24 Does the system contribute to the sustainable development of the commu-
nity? How is this measured?
Notes
1 In this book, the author used both euros and US dollars because she quoted prices
from reports that were written during the past seven years. Because the precise date
when the price was found was not always available, the author chose to keep the
price in its original currency rather than use an arbitrary conversion rate in the year
of publication.
2 The industrial sectors included in the first ETS compliance period are combustion
plants, oil refineries, coke ovens, and iron and steel, cement, glass, lime brick,
ceramics, and pulp and paper plants [13].
3 Forestry CDM projects can last for one crediting period of 30 years, or 20 years
with two renewal periods [48].
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44 Nicholls, M. (2006) ‘Trials and tribulations: Market survey GHG emissions’,
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45 CDM Watch (2003) ‘CDM Toolkit: A resource for stakeholders, activists, and
NGOs’, November
46 United Nations (2003) ‘Implementation of the Clean Development Mechanism in

Asia and the Pacific: Issues, challenges, and opportunities’, ST/ESCAP/2292
47 Gastelumendi, J. (2007) Interview with J. Gastelumendi, Kennedy School of
Government at Harvard University, Master’s of Public Policy student (Former
Head of Environmental Division at Estudio Grau), 4 March
48 Turnbull, D. (2006) ‘Equitable distribution in the CDM’, Climate Action Network
International Nairobi, ECO Newsletter, Issue 8, 13 November
49 UNFCCC Executive Board 27 (2006) ‘Annex 19: Regional distribution of clean
development mechanism project activities’, 1 November, UNFCCC, Bonn,
Germany
50 Wilder, M. (2005) ‘Implementing the Clean Development Mechanism and
emissions trading beyond Europe’, in F. Yamin (ed) Climate Change and Carbon
Markets: A Handbook of Emissions Reductions Mechanisms, Earthscan
Publications, Sterling, VA, pp231–261
51 Zhang, Z. X. (2000) ‘Estimating the size of the potential market for the Kyoto
flexibility mechanisms’, Faculty of Law and Faculty of Economics, University of
Groningen
52 Gordon, A. and Schrader, K. (2007) ‘State of carbon market report update shows
strong impact of Asia in market’, press release 2007/116/SDN, World Bank, 26
October
53 UNFCCC (2005) ‘Technology Transfer’, Proceedings of Seminar of Governmental
Experts, Tenth Conference of Parties, 16–17 May, Bonn, Germany
54 CDM Executive Board, Guidelines for Completing the Project Design Document
(CDM-PDD), the Proposed New Methodology: Baseline (CDM-NMB), and the
Proposed New Methodology: Monitoring (CDM-NMM), Version 04, UNFCCC
55 Seres, S. (2007) ‘Analysis of technology transfer in CDM projects’, UNFCCC
Registration & Issuance Unit CDM/SDM, December
56 UNFCCC CDM (2008) Project’s Location: Interactive Map, 20 April, available
from http://cdm.unfccc.int/Projects/MapApp/index.html
57 International Energy Agency (2007) World Energy Outlook 2007, IEA, Paris
58 Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former
Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras
Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, March
60 Gottfried, P. (2007) Interview with P. Gottfried, Project Manager for Fuerza Eólica
of Mexico, 17 August, Mexico City, Mexico
61 UNFCCC (2007) ‘CDM project activities’, December, available from
62 Broide, A. (2007) Interview with A. Broide, Development Manager for
Mesoamerica Energy, 26 September, San José, Costa Rica
63 Moreno, R. (2007) Interview with R. Moreno, President of Santa Fe Energy, 4
October, Panama City, Panama
64 Jongezoon, L. (2007) Interview with L. Jongezoon, Developer of Renewable
Energy Projects for Ecomina, SA, 6 September, Guatemala City, Guatemala
65 Holloway, B. (2008) ‘Turbine waiting list hits wind farm’, in Waikato Times, 22
November, Waikato, New Zealand
66 Dias, J. (2007) Interview with J. Dias, Site Engineer for Polaris, 19 September, San
Jacinto, Nicaragua
67 Loy, D., Fütterer, H., Jüttemann, P. and Reiche, D. (2004) Energy-Policy
Framework Conditions for Electricity Markets and Renewable Energy: 21
Country Analyses, Terna Wind Energy Programme, Deutsche Gesellschaft fur
Technische Zusammenarbeit (GTZ) GMbH and Federal Ministry for Economic

Cooperation and Development, June
68 Business News Americas, ‘ICE launches Diquís geotechnical study bidding’, 16
March 2008
69 Business News Americas, ‘Cerro Prieto geothermal tender attracts 4’, 16 March
2008
70 Business News Americas, ‘Isagen seeks proposals for geothermal project study’, 20
December 2007
71 Business News Americas, ‘Ministry to complete renewables, geothermal plans
mid-2008’, 20 December 2007
72 Uribe, C. (2007) Interview with C. Uribe, PDD Author of Curva de Rodas, 17
October, Medellín, Colombia
73 Samora, R. (2007) Interview with R. Samora, Head of the Rio Azul Plant for
SARET, 28 September, San José, Costa Rica
74 Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo, 16
75 Cinteno, M. (2007) Interview with M. Cinteno, La Chureca Site Manager for the
City of Managua, 19 September, Managua, Nicaragua
76 Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at
Valdez Sugarmill, 28 October, El Milagro, Ecuador
77 World Bank, UNDP and World Business Council for Sustainable Development
(2004) ‘Case Studies: Costa Rica: Reducing the impact of agro-industry
wastewater’, at Energy for Development Conference, 12–14 December,
Noordwijk, The Netherlands
78 Beuermann, C., Langrock, T. and Ott, H. (2000) Evaluation of (Non-Sink) AIJ-
Projects in Developing Countries (Ensadec), Wuppertal Institute for Climate,
Environment, and Energy, Wuppertal, pp1–48
79 Coto, O. (2007) Interview with O. Coto, CDM Consultant, 1 October, San José,
Costa Rica
80 Shiverly, B. and Ferrare, J. (2004) Understanding Today’s Electricity Business,
Enerdynamics, San Francisco, CA
81 Millán, J. and von der Fehr, N. (eds) (2003) Keeping the Lights On: Power Sector
Reform in Latin America, Inter-American Development Bank, Washington, DC
82 Energy Sector Management Assistance Program (2007) Latin America and the
Caribbean Region (LCR): Energy Sector – Retrospective Review and Challenges,
15 June, World Bank, Washington, DC
Section 2
Barriers
2
Technical Barriers
Technical barriers result because of a poorly designed, sited, maintained or

installed system. If a project fails a yearly monitoring and verification test for
technical or other reasons, it does not generate Certified Emission Reductions
(CERs) and earn the associated revenues. For example, in Mexico, three of the
six methane capture projects the author visited were not functioning properly.
Local farmers were not concerned with the malfunctioning because they did
not realize that the flaring of the methane to create the less potent greenhouse
gas of CO2 was how the CERs and associated revenue were generated.
Furthermore, they most often worked on the farm but did not own it and most
likely had little incentive to facilitate the generation of CERs as they would
receive none of the CDM revenues.
The technical barriers to project development tend to vary based on the
type of technology utilized. However, there are some problems that apply to
almost all areas of development. Therefore, this chapter first addresses general
technical barriers to development and then discusses the individual challenges
to each technology type one by one. This chapter also covers barriers that
relate to the high cost of or lack of availability of certain technologies used for
renewable energy generation.
General technology challenges

Most technical challenges that face CDM project development in the region are
technology-specific, but there are some problems that apply to almost all areas
of development. Unreliable electrical grids, which stem from a lack of spinning
reserves to back up peak demand, poor and overtaxed transmission lines, and
rudimentary dispatch centres,1 lead to frequent grid outages and voltage fluctu-
ations that can harm equipment. For example, in Colombia the average
number of grid failures that affected one customer per year was 186 and the
number of hours annually that customers went without electricity was 66 [1].
The gas turbines used at Río Azul landfill in Costa Rica are designed to
withstand 12 outages per year. Plant managers contend that there are usually
about seven outages per day due to the introduction of oxygen into the system,
44 BARRIERS
because the tubes that carry methane from the landfill to the generator are
routinely stolen. The result is levels of gas that are too low to provide adequate
fuel for the generator [2]. Turbines at La Babylonia hydro site in Honduras
have a special device to divert water from the turbine when the grid fails and
operators stand by to handle about three grid interruptions per day during
peak demand. They must be ready to resynchronize the equipment to the grid
manually when these failures occur [3].
More than being just a technical challenge, these grid interruptions cause
plants to lose money since many markets in the region provide generators with
a fixed price per kWh produced and energy is not produced when the plant has
to stop operations [3]. For purposes of Clean Development Mechanism (CDM)
revenues, emission reductions are also not produced during these times.
Hydro
In general, renewable energy sites for development can be complex and expen-
sive given their remote nature. However, renewable energy is often the most
economical form of electricity for these isolated areas, since serving these areas
by the grid would be even more expensive. Hydro facilities can be especially
burdensome to access since areas where there is a large difference in elevation
and a stream tend to be in mountainous regions with poor or no infrastructure.
For some sites, such as La Babilonia and El Coronado in Honduras, construc-
tion workers had to carry equipment such as tubes, cement and compressors
for tunnel construction on their backs and on mules 4km with 500 metres of
elevation gain to the site in order to construct the run-of-river sites, which were
under 5MW [3]. Replacing parts and having technicians service these remote
areas is also complicated. Project owners are responsible for connecting their
electricity to the closest three-phase point in a transmission line. The remote
location of wind, geothermal and hydro sites can mean that this distance is
very significant.
Even cheap labour in the region cannot always compensate for the costs of
this type of construction. Companies often must budget for the construction of
a road, cable car or bridge in project costs in order to safely transport compo-
nents. In this way, these new infrastructure improvements can help modernize
communities, increasing commerce [3].
Frequent hurricanes hit this region during the months of August,
September and October. Hurricane Felix of 2007 caused a landslide that
smashed part of the tubing at El Coronado hydro site in Honduras and
decimated photovoltaic (PV) panels that were installed on the eastern coast
of Honduras. These storms also create hazards for hydro projects by causing
trees to fall in the watershed that leads to the river. Deforesting of the area
can impact stream flows and cause siltation and debris build-up that blocks
dams.
Although the equipment for hydro generation has been in use for over 100
years, some project developers are proving ‘first-of-a-kind’ additionality by
TECHNICAL BARRIERS 45
Figure 2.1 Hurricane damaged pipe for hydro electric
adding slightly new parts to the system, such as a tunnel-boring machine for an
8km pipe in a run-of-river application that tried to make minimal environmen-
tal impact by not displacing the vegetation on top of the tunnel area [4].
Overall, the common use and long history of hydro makes it difficult to prove
technological barriers are broken.
Hydro projects also face a new challenge in that the European Union (EU)
will no longer accept CERs from projects larger than 20MW unless the dam
complies with the World Commission on Dams guidelines. The exact guide-
lines for CER purchases above 20MW was unclear as of March 2008 and the
rules to better define qualifying projects were being formulated [5]. The
reasoning behind this size requirement is that it would help prevent the
negative impacts of large dams, like having areas of land flooded, creating
methane emissions. Run-of-river projects, which consist of turbines placed
directly in the river and moved by the river’s flow or the diversion of water
into a pipe that is run downhill through turbines, have no dam or smaller
dams that hold water for just a few days of generation and therefore tend to
displace or disturb fewer people and cause less evaporation from reservoirs
[6]. The UNFCCC has a limit on the surface area of reservoirs within the
existing Approved Consolidated Methodology 0002 [7]. Small-scale hydro
projects in Chile also may be at an advantage as hydro projects must be under
30MW in order to be eligible to fulfil the country’s 10 per cent renewable
46 BARRIERS
energy mandate by 2024. These new guidelines may directly provide project
support for small-scale projects as it is more difficult to get larger projects
registered.
Wind
Wind energy projects in Latin America can be challenging because the technol-
ogy for this type of energy generation is still relatively new and unproven in
many of the Latin American countries [8]. This unfamiliarity with projects
makes investors and project developers alike hesitant to get involved. However,
some areas with excellent resources, such as Oaxaca, Mexico, Chile and the
northeast coast of Brazil, have been recognized by international companies like
Gamesa, Pacific Hydro and Iberdrola [9]. With the backing of these large
companies, wind farms of 100MW and larger are being installed in some of
these areas. Countries like Uruguay and Peru that do not yet have a wind map
are at a disadvantage. Even though the coast of Peru is not very well studied, it
seems to have potential [10]. A combination of a lack of renewable energy
incentives, resource information and investor confidence has not allowed sites
in Peru to develop quickly [10].
Even when there is a wind map of the country showing areas suitable for
development, there may not be an appropriate place to hook into the grid. In
Uruguay, a team of German developers did studies and found that a site on the
Uruguayan coast on the border with Brazil was a good wind resource. When
they then went to see how they could connect with the Uruguayan grid, they
found that the voltage in the area was low, and that they could not produce
and transmit electricity in this area of the grid [11].
Some of the investor fear in this fairly new technology is merited since
certain areas of the region have unusual wind regimes of Class 7, which is 8.8
metres per second (m/s) and higher, that have not been extensively tested by
today’s large turbines [12]. Patagonia is a region with excellent average wind
speeds of close to 10m/s that at first consideration seems like an ideal place for
wind farms. However, the wind speeds there can be very strong, up to 16m/s,
or non-existent. Therefore, turbines that are specially designed for this wind
regime are necessary. The large, 1.5–2MW turbines that are currently being
installed for most new wind farms in Europe work best with lower, steady
wind speeds and may not survive the intermittent strong winds of Patagonia
and Oaxaca. Industrias Metalúrgicas Pescarmona SA (IMPSA) of Argentina
has designed a turbine without gears, able to handle variable wind speeds more
efficiently. However, in a test situation, an IMPSA turbine was pulled out of the
ground by the high wind of Patagonia and injured three people [13].
The newness of wind energy complicates the permit process for farms.
Often, countries do not have a standardized procedure for wind farms, and
hydro or other permit procedures have to be modified to fit the new technol-
ogy. This modification process can be time-consuming and discourage
developers since the bureaucratic process of facilitating a new permit
procedure can involve long delays. Empresas Públicas de Medellín had to

modify a hydro permit for use at a wind farm [14]. The permit process can be
complicated by those who fear that the turbines could interfere with bird
migration patterns and bat activities or create a noise disturbance. Project
developers in Mexico found ornithologists wanted bribes in order to allow the
development of a farm [15].
Physically installing the wind turbine equipment can be challenging in
areas that do not have infrastructure that supports the installation of turbines.
For example, developers of Nuevo Mantanial, a 4MW wind farm in Uruguay,
had to rent cranes from out of the country to install the turbines. The process
was very costly as the minimum rental time for this equipment is one month
[11].
Another complication is that in countries with dispatch rules that do not
prioritize wind energy, this resource could be incorporated into the grid’s
system last, and for a limited amount of time, attracting few energy
payments. Most wind advocates argue that wind is a ‘use it or lose it’
resource that must be put on the system when available and therefore should
have dispatch priority above other resources. Improving storage capabilities
with large-scale vanadium redox batteries, pumped hydro reservoirs or
compressed air energy storage would make this resource more dispatchable
and may be pursued more in the future. However, thus far, these storage
techniques used in conjunction with wind energy are largely experimental
and confined to developed countries. Therefore, some countries like
Colombia have taken steps to make ‘use it or lose it’ resources under 20MW
the first energy dispatched as a part of the national law [16]. But others that
do not have this exception expect wind to compete in the least-cost bid
process that requires wind energy to compete on a price basis with other
technologies and only receive payments when it is selected by grid managers
as one of the least-cost options.
Other problems with integrating wind projects into the national grid
include the complexity of putting an intermittent resource into a grid and
ensuring that it will not cause instabilities in the system. The maximum
amount of wind on the three US transmission grids that utilities predict can be
utilized before it would produce grid instability is close to 25–30 per cent of the
overall generation [17]. This estimate is based on the flexibility of the system’s
dispatch centres as well as the current portfolio mix of resources, which
includes many baseload sources. Grid managers in Latin America are less
familiar with this resource and unsure of how much wind energy the grid can
sustain.
One way to remediate the problem of grid interconnectivity is by making
the hydro and wind portions of the grid complementary. If there is a large
portion of hydro on the system that is susceptible to drought conditions, wind
could exacerbate the unpredictability of when energy would be available.
However, some areas have wind regimes that are complementary to hydro
availability [18].
48 BARRIERS
In Uruguay, a team of German developers did studies and found that a site
on the Uruguayan coast on the border with Brazil was a good wind resource.
When they then went to see how they could connect with the Uruguayan grid,
they found that the voltage in the area was low, and that they could not
produce and transmit electricity in this area of the grid [11].
A recent barrier to wind energy development in the region has been the
inability to get the equipment needed for small applications because of a global
wind turbine shortage. In many of these countries, a 15MW farm is a significant
capacity addition. This size farm is all that can be financed and anything larger
would flood the country’s grid with too much intermittent generation. This is
especially the case in the small countries of Central America and has been the
experience of developers in Honduras. Also, in Ecuador, a 15MW project called
Salinas received all of the necessary permits and completed a Project Design
Document (PDD) only to find that turbine manufacturers were not interested in
an application that small. The current global shortage of turbines has created a
significant barrier for small projects since little orders are not the priority of
manufacturers. The wind developer for Cristelería Toro of Chile had to source
turbines for its 3.45MW wind farm in part from a new Chinese manufacturer
called ZheJiang Huayi and partially from used turbines from Germany [19].
Biomass
Biomass can be a high-energy fuel that can be gasified or burnt in a boiler that
operates a turbogenerator. The history of biomass utilization for power produc-
tion in Latin America dates back to over 100 years ago as sugarcane producers
burnt the stalk residues, known as bagasse, in order to get rid of the waste and
produce electricity to sustain the sugarmill plant’s operations. These electrical
applications are also used for process heating; the bagasse that is burnt heats
water for electrical production in a Rankine cycle and is used to evaporate water
in the process of isolating the sugar. The bagasse is generated when the sugar-
cane water is extracted at the factory by machines that flatten the stalk.
Therefore, the stalk residues are already at the plant and would have to be
trucked away if not utilized for energy production. Efficiency was not especially
important to plant operators since there was typically more bagasse than the
owner needed and selling electricity back to the grid was not an option. In some
cases, these sugarmills were not even connected to the grid [20].
Now, sugarcane producers are more interested in efficiency since they can,
in most cases, earn money for the excess electricity they produce through net
metering.2 Some countries like Ecuador even provide incentives like lucrative
feed-in tariffs for this type of generation. Sugarmill owners are now consider-
ing making their facilities more efficient by installing better boilers and
generators in order to take advantage of the CDM and renewable energy incen-
tives at the same time as lowering their electricity costs [21]. Typically, the
baseline for these projects is the burning of the bagasse. So, no additional
reductions for preventing the decomposition of the bagasse and associated
methane emissions are earned. Emission credits are earned for the electricity on
the grid that is displaced because of the generation.
These upgraded sugarcane biomass projects have tended to succeed in
countries like Ecuador and Central America that have a shortage of capacity.
Companies in these countries may face expensive electrical outages if their
complete electrical needs are not met. These countries are also the ones that
offer aggressive incentives for the development of these projects as a means to
take pressure off the national grid. Countries like Uruguay and Argentina are
just now beginning to consider these projects since the availability of natural
gas and associated affordable electricity has disappeared as a secondary result
of the Argentine economic crisis of 2002 [22]. More information about the
Argentine economic crisis and its ties to natural gas supply shortages can be
found in Chapter 10, ‘Argentina’.
Beyond using the bagasse, sugarmill operators have considered co-firing the
other residue of leaves from sugarcane and husks from a variety of crops such as
rice, water hyacinth and peanuts because it would provide a valuable 12-month,
reliable power source. However, thus far, using this high volume, low energy
waste has not been pursued. The primary reason for not using other crop
residues is that the transportation costs of moving it from the fields to the factory
costs more than purchasing other fuels, making it prohibitively expensive. The
sugarcane leaves and other residue, which are not taken to the sugar mill and are
left on the ground after the harvest, must be collected and transported for the
expressed purpose of electricity generation. This process increases the cost of
harvest by three times and necessitates the purchase of a mechanical harvester
[20]. Most of this residue also has a lower energy content than bagasse [21].
An economic analysis of the prospects for co-firing different types of
biomass with bagasse by Ecoelectric, which is running the cogeneration
portion of the Valdez Sugarmill in Ecuador, showed that in order for biomass
to be economical for power generation, it needs to cost about $2–3 per tonne
to transport from the fields to the factory. At this site, eucalyptus from a
plantation 50km away costs about $30 per tonne to purchase and transport to
the factory. The company has begun prospecting on its own land for areas to
plant fast-growing eucalyptus trees. Water hyacinth from 300km away was
also considered as co-firing fuel, but transportation costs alone are $15 per
tonne for this fuel because of its high moisture content. Ecoelectric has chosen
to use the palm fruit for $15 per tonne for purchase and transport to co-fire in
a 90 per cent bagasse, 10 per cent palm ratio at its plant [20].
Another reason why other types of residue have not been co-fired with
bagasse at sugarmills is because boilers that can accept a variety of biomass
products are more expensive than those that just burn bagasse. Also, the
approximate moisture content of different residues would have to be matched
for successful co-firing. In some cases, for the use of water hyacinth, commer-
cial equipment and the electricity to run it would have to be purchased to dry
this crop. Ecoelectric is unsure how their equipment will respond to palm fruit
being burnt with bagasse and plan to do several months of testing [20].
50 BARRIERS
Taking the crop residues away from the fields would leave areas without
organic residue to decompose and provide a natural fertilizer. Using this residue
would have to be weighed against the cost of fertilizer to replace these nutrients.
As previously mentioned, plant operators are interested in co-firing other
biomass with bagasse because it would allow year-round electrical production.
Only a few areas like Paramonga, Peru have year-round harvest. In all other
places, sugarmill owners are fixing repairs and not producing electricity during
three to four months of the year. During this time they suffer losses as they are
not receiving money for electrical payments, purchasing electricity from the
grid and not receiving CERs. The equipment used in the combined heat and
power process of the sugarmill is designed to create low-pressure steam that
evaporates the water off the syrup but does not provide optimal power produc-
tion. Therefore, in the non-harvest season when this steam for evaporation was
not needed, the plant would release this steam to the environment and could
annoy neighbours. Shifting to year-round electrical production would necessi-
tate different generation equipment that would not be optimal for the overall
plant’s operations during sugarcane production [20].
Considering electrical production outside of a sugarmill with just crop
residues has not yet been economical. The aforementioned problems of energy
density and transportation costs prevent this practice from occurring. In Chile,
there are a few projects that have been able to take advantage of the harvesting
of wood biomass for generation. At Nueva Aldea biomass plant, wood will fire
a 37MW cogeneration plant to sustain the operations of a paper mill [23]. At
Trupan wood panel plant, excess biomass on land will partially sustain the
plant’s operations and sell back to grid in a 30MW plant [24]. At Russfin
sawmill, wood scraps like stumps and branches that would otherwise decay on
the ground will be used in a 1.2MW plant [25]. These applications were
successful because they existed near plants that were already in the business of
harvesting wood and transporting it to a central facility, suggesting that a tradi-
tional biomass plant using wood that is harvested specifically for electrical
production is not economically viable.
Geothermal
Being located on the ‘ring of fire’ affords many Latin American countries excel-
lent opportunities for geothermal electrical development. However, few countries
have explored this potential because of the high capital costs of these plants. The
first costs of drilling one hole for steam extraction average about $2 million. This
high cost led developers of San Jacinto geothermal plant in Nicaragua to choose
a site that had already been partially developed by Russians in the 1980s [26].
The depth of the hole for steam extraction can vary the first costs of
geothermal development significantly. Alquimiatec developers in Ecuador are
interested in a site near Quito for its potential as a shallow field. Precise feasi-
bility studies that show a close approximation of the earth’s structure and how
deep developers would need to drill are necessary to minimize costs [27].
If the geothermal prospecting team is not experienced at returning the

extracted steam into the hydrological deposit where it came from, this form of
energy is not renewable. Poorly designed steam extraction and water reinser-
tion at Momotombo geothermal power plant in Nicaragua depleted this
resource prematurely and necessitated a rehabilitation project to correct the
mistakes made [28].
The equipment for drilling geothermal holes is the same as the equipment
for extracting oil. Drills tend to be large and not always available. When
considering where to develop these sites, it is important to keep in mind the
accessibility of the site for this heavy, bulky machinery [26].
Economies of scale are also key when considering geothermal develop-
ment. Because of the cost of prospecting a site in detail, renting the drills,
buying the power generation equipment and running transmission lines to the
closest point of interconnection, it makes more economic sense to develop
several extraction wells for a large generation facility rather than to develop
few holes for small-scale electrical production [26].
Landfills
For landfill gas projects, emission reductions are derived from converting the
methane that would have been released into the atmosphere from the decom-
posing garbage into CO2. Since CO2 is a 21 times less potent greenhouse gas
(in a 100-year time scale), converting the methane to CO2 results in a reduction
of overall warming potential [29]. This conversion can take several forms. It
can be completed through burning the methane in flares. It could theoretically
be liquefied and used as fuel, but this technique is still experimental [30]. Or,
the methane can be burnt to produce CO2 in a turbo-generator and produce
electricity. In the latter conversion method, emission reductions are derived not
only from creating a less potent greenhouse gas out of the methane, but also
from a displacement of fossil fuel, grid-based electricity. Gas is collected from
landfills by a system of vertical and/or horizontal holes filled with perforated
tubes. A negative pressure is applied to the tubes and the methane is trans-
ported to a central flaring or power generation facility.
The large number of emission reductions from these projects with lucrative
possibilities has led to the aggressive pursuit of landfill gas projects throughout
the region with a total of 86 implemented by March of 2008 [31]. Developers
like Green Gas and carbon brokers like Ecosecurities were immediately inter-
ested in these projects since they seem to offer a plethora of reductions with a
minimal amount of infrastructure. Also, the additionality argument for these
projects is solid since none of the countries require the bulk of the methane
from landfills to be destroyed.
However, some countries, such as Mexico, Colombia and Costa Rica,
require off-gassing and flare from landfills for safety concerns. Because of this
off-gassing requirement there are rudimentary chimneys that have been sporadi-
cally inserted in landfills in countries with the requirement. However, these
52 BARRIERS
chimneys are poorly maintained with flares that are rarely lit and moved infre-
quently, so the amount of landfill gas that they off-gas is estimated to be only 3–7
per cent of the total gas available in the landfill [32 and 33]. So, even landfills
with off-gassing chimneys and flares have sparked the interest of developers.
Landfill methane capture projects have to be implemented quickly since the
gas in municipal solid waste peaks within a year of the site being covered, and
then diminishing amounts of gas are produced over 30 to 50 years [34]. A
study for a landfill gas capture project for Mexico City began, but difficulties
coordinating with all of the municipalities, trash collectors and local stakehold-
ers has delayed the project past the point when large amounts of methane can
be extracted [33]. Therefore, these projects are most economical if imple-
mented while trash is still accumulating or soon thereafter. Also, piping can be
installed horizontally and vertically to capture the maximum amount of
methane if the project is started while the landfill is still in operation. Methane
capture works best when the site is a designated landfill and not a dump. In
Latin America, landfills have a plastic liner below the trash, have a water
drainage system, and sometimes have materials sorted before they enter.
Sorting trash before it enters and having a plastic liner beneath the pile helps
ensure that there will be a certain amount of organic waste content [2]. Also,
when the landfill is constructed with a stepped design that is based on when the
trash was dumped, it is easier for engineers to know where the most gas can be
found based on the age of the trash [32].
Experience from landfill projects in the region points to some of the
challenges with these projects. Río Azul is a dump (not a landfill) in San José
that was retrofitted in 2003 for gas capture and electrical production. A techni-
cal closure to repair erosion and make space for new trash coincided with this
methane capture project and led to the crushing of 40 per cent of the landfill
wells drilled for methane extraction because of poor communication between
the various entities that own the plant. Some other holes for methane extrac-
tion have been destroyed as the mound of trash has shifted. And, tubes used to
transport the methane from the field to the site of generation are now
frequently stolen since there is less activity after the technical closure and fewer
guards on the site. All of these factors have led to the plant producing 25 per
cent of the expected gas and associated emissions reductions [2].
The Zámbiza dump in Quito, Ecuador was retrofitted for flaring and future
electrical production and is also under-producing gas by 50 per cent [27]. The
lack of a liner on the top of the trash at the Zámbiza dump has not been
problematic since the volcanic clay that existed naturally in the area and was
used to cover the trash is impermeable and prevents rainwater from entering
and methane from escaping so that it can be extracted through piping. However,
a river runs under the landfill site and is allowing some methane from the trash
to escape. Also, the river is compromising the structural integrity of the site by
transferring pollutants from the site to the watershed below and allowing shift-
ing that may one day cause the mountain of trash to move and destroy a
highway that the city has constructed on top of the site [27].
Another landfill in Ecuador, called Las Iguanas, near the city of Guayaquil,
is in the process of being converted for methane capture. The project manager
is hopeful that the fact that the site is a true landfill and has a stable support
system will make the project a success [35]. In Medellín, Colombia, the
University of Antioquia is working on how to improve the amount of methane
that could be extracted from Curva de Rodas landfill by better covering the site
with an impermeable material to allow less oxygen to enter [32].
Although most of the landfills or dumps that are retrofitted for methane
capture hope to also generate electricity, few actually do. Often the electrical
generation portion of the project is added on after the initial infrastructure to
capture methane is put in place. The electrical portion is usually relatively small
in comparison to the size of the landfill. For example, of the Ecomethane landfill
to energy projects in Mexico, the sizes of electrical capacity will be as follows:
Durango 2MW [36], Tultitlan 1.3MW [37], Aguascalientes 2–4MW [38] and
Ecatepec 2–5MW [39]. However, because of the low volumes of gas that most
of these sites are generating in comparison to the predicted amounts calculated
during the feasibility studies, purchasing a generator and other power genera-
tion equipment and connecting to the grid is too costly to justify [27].
In some cases, not producing the predicted amount of gas can cost develop-
ers more than just the poor investment in equipment. Operators of Río Azul in
Costa Rica are currently paying a penalty for not being able to provide the
expected electricity because of the low volumes of gas reaching the generators.
Developers who also entered a contract for sale of the CERs from this type of
project may also be subject to a penalty [2].
Agro-industry and other methane capture possibilities

There are other important methane capture possibilities for the region beyond
landfills. There are several methane capture options within the agro-industry
for farmers that produce methane from animals’ excrement, crops that have
residues or wastewater used for processing of organic materials.
Fedepalma of Colombia is an association of palm oil producers that has
aggregated farmers to collectively undertake construction for methane capture
and flaring and/or electrical production. Within the palm oil production, much
water is used to extract and clean the palm fruit. This water is full of organic
material and is usually treated by allowing it to sit in a series of artificial
swamps before being released into the closest waterway. Fedepalma is a group
of 32 palm producers collectively taking advantage of CERs by treating this
wastewater in a biodigester that would be covered with a plastic liner.
Fedepalma has contracted CAEMA of Colombia to create one PDD for all of
the biodigesters under an umbrella project. Each palm owner will get a portion
of the CERs derived [40]. Other palm producers in Central America are inter-
ested in CDM, but this project with Fedepalma is more developed and
economically viable than these Central American interests because of this
bundling technique.
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The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) has

boldly pioneered methane capture in Latin America from human wastewater
treatment plants. The first experiment with this technology began operating in
1999 and has been a huge success. Since this initial application was installed
before CDM came into effect in 2001, EPM is hoping that their planned subse-
quent locations will earn CERs [41]. Japanese bank Sumitomo is also
interested in developing methane capture for CDM credit in the wastewater
treatment plants they have invested in near San Luis Potosi, Cuidad Juarez and
Coyocan, Mexico [42].
Within farms that have a critical mass of animals that is large enough to
support methane capture, there are possibilities for the capture of methane
from excrement. There are few of these farms in the small Central American
countries. Approximately 5000 hogs in full cycle (sows, gilts, boars, weaners
and finishers) are needed in order to justify the costs of the biodigester. These
animals also have to be in fairly close physical quarters since trying to consoli-
date wastes from many locations is complicated and expensive. Hog farms
have been the ones to be most extensively developed, but there is also interest
in dairy farms since the cows are kept in one facility instead of grazing in fields.
Also, there could be potential within slaughterhouses to cover and capture
methane from the discarded animal blood. Because of these size requirements,
only countries with large farms and developed industries can support these
projects. Mexico and Brazil dominate the landscape for these projects with 75
per cent of the total in the region as of March 2008.
While these projects seem like a relatively easy way to earn reductions, they
can be deceptively difficult. An in-depth description of the Mexican experience
with these biodigesters follows.
Mexican methane capture case study 3

Introduction
Mexico’s well-developed hog industry, which is composed of some 5 million
farms and over 18 million pigs, has successfully capitalized on revenues from
the Kyoto Protocol’s CDM [43]. Since most hog farms in Mexico used anaero-
bic lagoons where methane was created during decomposition, the industry in
this country was ripe for development of credits from the destruction of this
methane. These anaerobic lagoons consist of open pools where solid and liquid
waste settles, allowing methane from the excrement to be released into the
environment before the contents of the lagoon are eventually discharged into a
local waterway, evaporated or sprayed on crops. These lagoons provide
minimal remediation of the wastes before they enter waterways and only a
rudimentary way of preventing water contamination. Other farms, usually of a
smaller size, did not treat the waste at all and simply let it run into waterways
and decompose aerobically as it was oxygenated in moving water. At these
farms, small quantities of greenhouse gases are emitted as the excrement
decomposes and no emission reduction projects can be developed. Therefore,
only the hog farms with lagoons that produce methane are suitable for digester
construction and generation of CERs since in the absence of these digesters, the
lagoons would have released methane [44].
In addition to providing local farmers with a solution to the odour and
water contamination problems that had begun to create tense relationships
with neighbours, these projects are considered desirable from a financial
perspective. Occasionally, farmers without biodigesters have to pay fines for
the polluted water they discharge from the waste lagoons, which must be 90
per cent free of solid organic matter [44].
By November 2007, 56 per cent of the CDM projects in Mexico were
methane capture from hog farms, and these projects constitute 49 per cent of
the CERs that will be generated within the country by 2012. With a predicted
11,000 more CERs than will be derived from their closest competitor, Brazil,
by 2012, Mexico has also benefited from more biogas capture projects than
any other country in the region [45]. Mexico has enjoyed such success with
these projects for several reasons. Unlike its neighbours to the south, Mexico
has hog farms with a critical mass of animals that is enough to make a digester
viable. Also, many of the hog farms belong to a group of farms all pertaining to
the same owner, such as Granjas Carroll Mexico (GCM) and Soccoro Romero
Sanchez. It is therefore easier in Mexico than other countries to bundle multi-
ple farm sites in order to take advantage of the small-scale methodology, and it
is less risky to bundle several biodigesters with the same owner because compli-
ance and communication with farm veterinarians and operators is simplified.
The small-scale methodology applies for projects that yield less than 60,000
tonnes of CO2 destroyed annually. These projects can be combined for the sake
of lowering project costs by creating only one PDD and being evaluated by one
auditor and verifier [46].
These farms have also been developed in Mexico more than any other
country in the region because AgCert, the self-proclaimed ‘worldwide leader in
agriculturally derived emission reductions’, set up operations in the country
and aggressively developed and registered 58 projects by March 2008 with
more than 120 staff serving the country [47]. Ecosecurities also took interest in
these projects by doing the carbon qualification for 29 methane capture
projects from hog farms in Perote, Mexico with Granjas Carroll Mexico. As
some farmers began to take advantage of the opportunity to earn money from
their hog waste, word spread, and more farms became interested.
Despite Mexico’s important role in the market, technical problems with the
operation of these farms have placed their future in jeopardy. Future methane
capture opportunities in the country could be focused on other types of agro-
industries or landfills.
Digester functioning
Understanding the technical barriers facing biodigesters in Mexico is enhanced
by knowledge of how a digester operates. Hog farm or feedlot effluent in the
form of excrement runs or is swept into pits and is then pumped or drained into
56 BARRIERS
Figure 2.2 La Joya Site III biodigester in Puebla, Mexico
a large container. Here the excrement is collected and allowed to sit for approx-
imately 30 days in a plastic-lined and capped container. Depending on the
density of the excrement, plastic walls are sometimes placed inside the digester
to slow the movement of the excrement through the process so that it produces
sufficient methane. Sometimes Mexican digesters involve heating, mixing or a
plug-flow process where the waste moves through the digester over time. The
more simple systems without these features are termed ‘covered lagoons’. See
Figure 2.2 for an image of a functioning pressure biodigester in Mexico.
After methane is produced, it runs through pipes and a meter to a flare
where it is burnt to produce CO2, a greenhouse gas that is 21 times less potent
when considered in a 100-year time scale [49]. Sometimes, fans that blow the
methane from the digester to the flare must be turned on to ensure that too
much methane does not accumulate under the plastic cover. This seemingly
simple system is a relatively new technology that has been implemented in
several places throughout the world from India to the US. However, each
digester is different because of the animals that contribute to its contents and
its location; therefore, each system must be considered individually in order to
ensure proper functioning [50].
Prerequisites
There are certain prerequisites for healthy digester functioning that must be
fulfilled in order for CERs to be created. The site of the digester is perhaps the
most important factor in digester functioning since digesters that are located at
high altitudes or in cool weather have a hard time maintaining the 25–30°
Celsius temperatures needed. Hog farms at high altitudes in Mexico have had
difficulty maintaining a constant temperature. To remediate this problem,
operators of several hog farms at high altitude in Perote, Mexico are considering
heating the contents of the biodigester with the excess heat from a microturbine
that would burn methane from the digester [51]. Also, if located in a site with
frequent rain, the digester can remain too cool as pools of water gather on the
surface, deflating the methane bubble and lowering the temperature of the
excrement. In Mexico, AgCert hog farms in the state of Veracruz often have
pooling of water because of the frequent storms during the rainy season. If the
project has no full-time grounds keeper and relies on weekly visits from an
engineer who lives remotely, then there is sometimes not a pump on site to move
the water off the top of the digester surface. And, even if the local farmer has a
pump, he does not always cooperate and use it in a timely fashion [44].
The diet of the pigs can cause fluctuations in the pH, which needs to
remain close to 7. Adding ingredients to the excrement to make it more acidic
or alkaline can cause large pH swings that overcompensate for the original
problem. However, one project developer from Granjas Carroll Mexico has
found that their excrement is too alkaline at an average of 7.9. This project
developer is planning on adding buffer tanks that will neutralize the excrement
before it enters the main repository [51].
If the animals suffer from a disease and are prescribed antibiotics or given
vaccinations, the medicine can harm the bacteria living in the digester. A close
relationship with the farm veterinarian can help prevent the overprescription of
antibiotics, and use of medicine on a rotating group of animals to decrease the
impact of medicine on the digester. Likewise, non-biodegradable chemicals
used to clean animal stalls can also limit the productivity of the digester by
killing the micro-organisms that anaerobically decompose the excrement.
Empacador Toledo hog farms in Guatemala found that using too much water
to clean stalls made the waste too dilute. Toledo managers cut back on their
water use from 20 litres per pound of excrement to 5 by manually sweeping
waste into pits instead of hosing it and so resolved the digester problems [51].
The most essential part of the system for carbon credits is the actual
burning of methane from a flare after it has been captured. Often the pilot light
that flares the methane will get blown out by the wind, rain or a piece of the
flare that falls on top of it. Many flares have begun to install a solar-powered
backup pilot light since failure is so common [51]. However, three of the six
digesters the author visited had not properly insulated the cables from the solar
pilot light to the flare. The cables were therefore burnt.
If the methane does not burn clearly, there is a problem with the gas
content. Often an orange flame is indicative of too much CO2 in the digester.
Lime is mixed in to reduce the CO2 content. If there is too much hydrogen
sulfide in the gas, it can damage the flare over time. To reduce the amount of
hydrogen sulfide in the gas, the methane is sometimes passed through a pipe
with a piece of iron that attracts the harmful gas. Water is also condensed out
of the gas in another filter [44].
58 BARRIERS
Communication breakdowns
Communication between the farmer and the engineer is a critical component
of the success of digester projects. If the farmer or grounds keeper cannot
pass messages directly to the engineer, critical components of the system like
fans, pumps and pipes cannot be repaired in a timely fashion. Often parts for
systems have to be transported from the capital or even ordered from
abroad. Relying on a remotely located engineer to service a region of farms
proves problematic since engineers and farmers often do not have a direct
line of communication and messages do not always get relayed successfully
[44].
Contacting a project developer that is located abroad is even more compli-
cated if the company does not have permanent operations and staff in the host
country. Granjas Carroll Mexico had the experience of paying high project
costs for a foreign company called UEM Group, a Kuala Lumpur-based
company, to develop a project that used sophisticated technology that repli-
cated a design used on dairy cows. The tubes used have a diameter that is larger
than needed and better suited for cows instead of pigs. The plastic cover is
susceptible to tears from the mechanical devices that tighten it. The open flare
for the system worked for 24 hours before it burnt the pilot light cables and
threatened power lines that were sited too close to the flare. Since the project
developer is based abroad, they did not have a local engineer who could
frequently visit the project and offer technical assistance. As a result of this
experience, the project owner hired the locally based and more economical
Geosistemas to handle the rest of their digester development [51].
Electrical generation
Some of the digester project developers intended to have the system generate
electricity from the methane and wrote the PDD to include displacement of
carbon-intensive fuels from the electrical grid. While the use of methane to
produce electricity is a proven technology, several concerns about this aspect of
the project’s operations suggest that the first few years of electrical generation
could be a period of trial and error. Too much hydrogen sulfide not only
damages the flare, but can also cause malfunctioning of a generator or microtur-
bine. Doubts about the amount of gas that will be produced and the most
appropriate form of equipment make it difficult to size the system precisely [52].
AgCert has decided not to incorporate electrical generation in its projects
in Mexico because of the high capital costs of electrical equipment and uncer-
tainty about how to use some gas in the generator and then switch the stream
of gas to the flare. This project developer points out that for utilization of gas
in both a generator and flare, when excess gas builds up, the pilot light must be
ready to fire and the switch controlling the flow of gas streams must be
synchronized well to prevent the release of unburned gas into the atmosphere.
According to one of AgCert’s engineers, the gas cannot be sent to both the flare
and generator simultaneously [44]. Despite these doubts about electrical gener-
ation, the farmers at many of this project developer’s farms are planning on
buying generators themselves to make use of the methane and reduce or elimi-
nate their electricity bills, as they have heard can be done [53].
Excess electricity that is not used by the farm could theoretically be fed into
the grid as is being proposed by Ecoinvest in Empacador Toledo’s hog farms in
Guatemala. However, the structure of the Mexican market is such that it is
complicated to sell excess electricity back to the grid. Generators can either
earn 85 per cent of the state-run companies’ avoided cost or apply to be a self-
supplier and structure a Power Purchase Agreement (PPA) with a large
consumer who must own part of the generation project. Under both schemes,
the generator must pay high transmission tariffs. Also, the project owner is
responsible for setting up electricity lines from the point of generation to the
load [54]. Thus far, no hog farms have chosen to invest in a generator that can
produce more electricity and feed it into the grid with the hope of earning
money from the excess generation. Therefore, electrical generation only serves
the farmer’s needs and earns carbon credits equal to the emissions that would
have been burnt if the farm was served by energy from the national grid or used
in a diesel generator on site.
Regulatory hurdles
Several upcoming regulations will make it more difficult to demonstrate
additionality for biodigester projects in Mexico. Additionality is a prerequisite
for CDM projects that attempts to ensure that all projects that receive credit
would not have occurred in a business-as-usual scenario. If regulations or
financial incentives exist that mandate or encourage the creation of a project,
then it is more difficult to earn CDM revenues.4
The benefits of biodigesters and new law that requires their existence may
jeopardize the additionality of these projects. Farmers were in some cases
paying fines for the water they emitted as effluent because their remediation
ponds did not eliminate 90 per cent of solids and qualify as acceptable accord-
ing to the Secretary of the Environment and Natural Resources (1996)
Standard [55]. Digesters improve the quality of the water, avoiding the
payment of fines, which for some farms amounted to $1000 per year. The
digester also negates the purchase of expensive equipment like solids separators
to improve the quality of the water [53]. For these reasons, a 2007 regulation
mandates that new hog farms install biodigesters. This law will probably limit
future development for CER production to only those currently existing farms
that do not have digesters and use lagoons to process waste [50]. The only way
that new digesters could be additional with this regulation is if this regulation
is routinely not followed for a few years and the PDD author can prove that
the regulation is not enforced [56].
Hog farms often have strained relationships with neighbours not only
because of the quality of water emitted from their operations, but also because
of the odour of the farms. There is no formal odour ordinance, but resolution
of these issues through the creation of biodigesters could be seen in the future
as necessary to maintaining cordial relations with those surrounding the
60 BARRIERS
project. About ten years ago, the state of Colorado in the US passed a law
requiring the state to regulate odours from hog farms [57].
An incentive for farmers to buy generators and use the methane produced
from their hogs to produce electricity exists in the state of Puebla. This incen-
tive supposedly pays half of the first costs of a generator, but there are doubts
as to whether there will be enough money in the budget to cover all farmers
that may be interested in this incentive. Socorro Romero Sanchez’s farmers
have begun taking advantage of this law; the government purchased the first of
three generators this company began using on its farms [50 and 53]. If the use
of this incentive became widespread, then financial additionality would
become difficult to prove.
Future development of methane capture projects

Given the aforementioned problems of methane digesters in Mexico, AgCert
has not been able to earn the emission reductions it expected from these
projects, which make up a large part of the company’s portfolio, and has
defaulted in forward-sale CER contracts. As a result, the AgCert stock has
dropped and in May of 2008, AES was in the process of buying AgCert [58].
Ecosecurities had similar problems when it guaranteed CER delivery and was
left with a quarter fewer CERs than it predicted in November of 2007 [59].
However, by the third quarter of 2008, both of these companies’ stocks had
begun to recover, and the problems initially encountered with the biodigesters
began to be resolved and gas started to be produced in more significant quanti-
ties [44].
Hog farms were the first biodigesters to be developed in Mexico, but
opportunities for methane capture exist within several other industries. AgCert
was doing tests on slaughterhouses in September 2007 to see if blood that
currently pools in artificial lagoons before being discharged into waterways is
viscous enough to produce significant amounts of methane. While AgCert had
dropped this effort by the end of 2008, Geosistemas had successfully
constructed a slaughterhouse biodigester in the Mexican state of Veracruz.
High density dairy farms and chicken coops are future areas being considered
for methane capture [44].
As of March 2008, 14 landfill gas projects had been registered in Mexico
[60]. All of these landfills plan on having small amounts of electrical genera-
tion like the first three projects in the country, which had capacities of 1–7MW
[61]. The future potential within landfills in Mexico for methane capture is
immense, but riddled with the challenges that were discussed previously in this
chapter.
Mexican methane capture conclusion

Given the questionable impact of future regulation that could negate digester
additionality, plus technical difficulties and communication barriers, the future
of methane capture for hog farms in Mexico is uncertain. The presence of large
hog farms with one owner has contributed to the success of these projects thus
far, but Mexico’s portfolio of projects may be diversified significantly to

include other types of CDM projects in the coming years as the challenges of
these projects become better known. Or, the period of digester trial and error
may be less onerous than expected and push development in new areas of
industry such as slaughterhouses, dairy farms, coffee farms, palm oil planta-
tions and landfills. Of these fledgling industries, landfills seem to be the most
promising in terms of emission reductions and investor interest. However,
experience from landfill gas capture projects throughout the region suggests
that these projects may be as difficult to operate as hog farm gas capture, as a
different set of technical, regulatory and social problems plague them.
Conclusion
The experience of CDM project developers shows that no type of renewable
energy project is immune to technical and technology problems. Even hydro-
electric projects that have been implemented for hundreds of years are not
without challenges, because of the remote nature of sites and the instability of
the grid. Less familiar projects, such as methane capture and wind, which
necessitate different equipment and conditions that locals are not familiar with,
have created more difficulties. Developed countries are still refining the
technologies for these systems and studying them as intermittent resources that
will impact the grid dynamics. As familiarity with these renewable energy
technologies and their maintenance increases in developed countries, increased
expertise, training and knowledge should be transferred to Latin America.
Notes
1 Spinning reserves are extra generating capacity that is synchronized to the grid
system and runs constantly in order to provide power backup and can be quickly
utilized by increasing the amount of torque on the turbine’s rotor [62].
2 Net metering allows electrical customers who generate their own electricity to sell it
back to the electrical company.
3 A revised version of the content in this section was published as an article entitled
‘The Status and Future of Methane Destruction Projects in Mexico’ in Elsevier’s
Renewable Energy in June of 2008.
4 Even though these regulations could make it more difficult to prove additionality,
small-scale projects have the benefit of only having to demonstrate additionality in
one of the several additionality categories, which include technological, financial,
prevailing practice and other categories. Large projects must show additionality in
all of these categories [46].
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49 US Environmental Protection Agency (2006) ‘Methane’, www.epa.gov/methane/
scientific.html, updated 19 October
50 Ochoa, V. (2007) Interview with V. Ochoa, General Manager of Granjas Carroll
Mexico, 22 August, Perote, Mexico
51 Landa, J. (2007) Interview with J. Landa, Granjas Carroll Engineer and
Construction Supervisor, 22 August, Perote, Mexico
64 BARRIERS
52 Landa Herrera, J. L. (2007) Interview with J. L. Landa Herrera, Director de

Construcción, Medio Ambiente, y Mantenimiento of Granjas Carroll Mexico,
24 August, Perote, Mexico
53 Perez, J. (2007) Interview with J. Perez, Farm Veterinarian for Soccoro Romero
Sanchez farms, 20 August, Teohuacan, Mexico
54 Secretaria de Energía de Mexico (1992) ‘Ley del Servicio Público de Energía
Eléctrica’, in Articulo 3º, 23 December
55 Secretary of the Environment and Natural Resources of Mexico (1996) Standard
NOM-002, p8
56 CDM Executive Board 36, ‘Methodological Tool: Tool for the demonstration and
assessment of additionality’, Version 04, UNFCCC, p4
57 Legislative Council of Colorado (1998) Amendment 14: Regulation of
Commercial Hog Facilities, State of Colorado
58 Point Carbon (2008) ‘U.S. power company AES proposes AgCert rescue package’,
Carbon Market News, 13 May
59 Carbon Finance (2007) ‘EcoSecurities’ woes prompt CER rethink’, 20 November
Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, March
61 CDM UNFCCC, Project Search, 30 October 2007 available from
62 California Independent System Operator (2006) ‘Settlements guide: Spinning
reserve due ISO’, 1 January
3
Social Barriers
Social barriers to project development fall into a variety of categories. The

most issues arise when there is resistance to a project by the country’s citizens.
Sometimes these conflicts arise because locals want revenues or other benefits
from the project owners in exchange for permission to develop. Other times,
problems result when the project is not incorporated into the community in a
way that is equitable and sustainable. These issues in general, as well as
examples from two of the most controversial projects, landfill gas capture and
hydro development, will be described.
Other types of social problems that jeopardize Clean Development
Mechanism (CDM) project success include stolen electricity, maintaining the
security of sites, legal issues of acquiring land ownership, and difficulty facili-
tating productive relationships among foreign developers.
Stealing electricity
A culture of not paying for electricity and hooking into the grid illegally has led
to black losses of 42 per cent in the Dominican Republic, 31 per cent in
Paraguay, 28 per cent in Nicaragua and 24 per cent in Ecuador [1]. Typical trans-
mission and distribution losses due to natural causes average about 7–8 per cent.
(This topic is covered in more detail in Chapter 18, ‘Ecuador’) These huge losses
affect a project’s ability to exist. The distributor that pays the generator measures
the kilowatt-hours produced on site and sent into the grid. Therefore, the distrib-
utor is responsible for paying the wholesale price for all of the electricity
produced, even if one-quarter to one-half of it is stolen. Then distribution compa-
nies begin operating at a loss and eventually cannot pay generators for the
electricity produced. Waiting months for late energy payments and having to file
paperwork to eventually receive payment creates a disincentive for project devel-
opers. Machala Power of Ecuador even had to sue its distributor for an overdue
energy payment [2]. Rate makers in Ecuador have attempted to recover some of
these financial losses for distribution companies in the rate formula, but are
hesitant to increase the price of electricity too much as it would prevent
customers from paying and encourage more theft [3].
66 BARRIERS
In areas like Ecuador where the unnatural distribution losses are very high,
neither distribution company representatives nor the police are adequately
equipped to enter neighbourhoods and demand payments. The national army
is required for this task. While one may assume that only poor neighborhoods
steal electricity, the truth is that in Ecuador both rich, gated communities and
poor slums that have sprung up on the outskirts of cities are stealing power in
almost equal amounts [4].
Better metering devices, a culture of paying for electricity, and improved
energy quality that locals can pay for are steps to help solve these problems.
The Colombian government hired psychologists to help design a programme to
reduce losses and has had success at lowering them from 23 per cent to 16 per
cent from 1995 to 2005. One of the tactics used was to offer customers who
pay their electricity bills for the first few months free professional soccer game
tickets [2].
Security
Renewable energy sites, as previously mentioned, tend to be located in remote
areas. Often it is not safe for investors or engineers to travel and visit the site
alone, and developers must hire bodyguards to accompany all visitors and
station permanent guards on site. The province of Olancho, Honduras requires
this type of vigilance for the sites of La Babilonia and El Coronado [5].
Río Azul landfill in Costa Rica, which uses methane for electrical genera-
tion, needs more than the one guard that watches the premises now that the
site is temporarily not accepting trash and has fewer people in the grounds.
However, technical problems have reduced the project’s revenue from
electricity payments and Certified Emission Reductions (CERs), and the
managers cannot afford extra security [6].
Legal challenges
Sometimes developers must first establish who the rightful owner of the land is
before they can buy or rent the land for generation activities. Often the people
living on the land are not the legal owners and the company must then go
through the process of compensating the owner and also providing relocation
or local benefits for the residents [7 and 8]. This situation occurred during
Fuerza Eólica’s attempt to develop a wind farm in Oaxaca, Mexico [8]. This
process can be lengthy, cause project delays and add an extra expense not
budgeted for in the project plan.
Other social issues

Latin Americans can be either fiercely patriotic or sceptical of their own
countrymen’s ability to do project development. These prejudices can influence
the success of CDM projects as people often have to work with CDM consul-
tants or engineers from both their own country and abroad. According to an
SOCIAL BARRIERS 67
Ecuadorian project developer, Colombians do not want to work with other

Latin American engineers from other countries [4], and local Honduran devel-
opers prefer to work with foreign engineers and brokers [9].
At Valdez Sugarmill in Ecuador, where sugarcane residue was being used
for electricity and generating CERs through the replacement of grid electricity,
locals were at first resistant to working with Brazilians. The Brazilians made a
recommendation for putting in additional structural support for the new
power house. Valdez’ plant operators did not follow this suggestion and after
five days of downpours during the rainy season, the foundation was unstable.
Then, the advice was followed and stabilization beams were installed [10].
Community resistance
Community acceptance of a project is paramount to the project’s success since
locals may bar project development. In Peru, 80 per cent of the community
must be in agreement with the project in order for the developer to get the land
permit [11]. Since the local acceptance of a project in the form of a stakeholder
meeting is a required part of the CDM process, dissatisfied citizens or commu-
nities unwilling to participate can prevent CER issuance. In Guatemala, Río
Blanco could not even gain the national CDM approval because it was so
controversial among locals [12].
Within the Latin American countries, high levels of corruption lead to diffi-
culty siting projects. Communities often refuse to allow the development of
projects until terms which may include political concessions, construction of
soccer fields, health centres, schools and water treatment plants are completed.
In Oaxaca, Mexico, Benito Juarez hydroelectric has been stalled because locals
associate private business with the government, against which they are striking
in order to influence decisions made by the Oaxacan governor [7]. Also,
communities may demand free or reduced-cost electricity, or step-down trans-
formers to access the electricity from the project. Local officials may require
bribes before construction can start. Both La Babilonia and El Coronado, small
hydro projects looking for CDM revenues in Honduras, suffered delays due to
attempts to block development in exchange for bribes [13].
Sometimes these bribe attempts happen because community members
think power companies are rich and can afford to make payouts. Other times
community members make demands because they think that they will suffer
from the operation of the hydro project in terms of water or agricultural land
lost. In the case of El Coronado, only one part of the community benefited
from the project development by receiving step-down transformers and access
to electricity. The part of the community that did not benefit, because it was
not in close proximity to the project site, was responsible for making demands
to the power company [13].
These types of social barriers could be even more prevalent in the future if
the programmatic CDM methodology, which was recently accepted in July of
2007 and is described in Chapter 8, ‘Small-Scale Barriers’, allows future rural
68 BARRIERS
energy projects to be viable. If some people do not receive the electricity from
these systems or are charged more for it, disagreement between village
members could occur. Also, the person who maintains the system must be
chosen carefully so as not to disrupt the hierarchy of the village, but also to
ensure that a capable individual is in charge of the system. Opportunities for
corruption are prevalent if the CDM revenues are not managed in a responsi-
ble way. In order to ensure that these pitfalls are not realized, locals must be
trained in non-technical skills of administration and rule-making in order to
successfully run a mini-utility [9]. Or, parts could be stolen if the system is not
incorporated well into the community’s existing hierarchy and structure [14].
Sandia National Laboratories has implemented projects that incorporate
training and safeguarding measures in order to avoid these pitfalls [15 and
16].
Project-specific conflicts
Hydro
Hydro projects can be particularly controversial because they can displace
communities as large areas of land are flooded and prevent communities from
having access to the water for current and future needs. These problems are of
such a magnitude that some hydro projects face opposition from groups that
are not just local communities. Large hydro applications that were constructed
in the 1970s and 1980s like Chixoy in Guatemala, Bayeno in Panama and Río
Cajon in Honduras had no environmental impact plan, and displaced people.
Those who resisted Chixoy were even killed, and were made martyrs in a
Public Broadcasting Service documentary about dam construction [17]. This
violent history attracted the attention of international and local environmental
groups that now block the development of both small and large hydro applica-
tions on the grounds that these projects destroy natural river ecosystems and
local cultures.
Communities can be impacted greatly by having their water regime
changed. Hydro plants limit some illicit harvesting from small coffee and bean
plantations and prevent locals from harvesting wood as the upstream land is
usually purchased in order to provide watershed protection [5]. Sometimes
tracts of land that were owned or occupied by farmers for agriculture or
dwellings must be sold to project owners to provide watershed protection and
a buffer zone for upstream flooding.1 Because of this land seizure, locals are
resentful of the construction and see the developers as unwanted foreign
entities in the community. Remote communities off the grid become resentful
of the project as it often does not provide them with electricity.
Acción Ecológica of Ecuador contends that companies will apply for the
rights to water for hydroelectric generation and steal these rights from locals.
According to the Water Law of 1972, the rights to water belong to the state in
order to reduce conflicts between landowners over irrigation rights. Private
citizens and companies have to petition for the right to the water. If the
SOCIAL BARRIERS 69
community has not formally petitioned and earned their water right, then the
company can earn it and leave the community with a dearth of water [18].
NGOs tend to have success barring hydro projects in countries where the
community of environmental groups is active and focused on the hydro indus-
try. In countries like Guatemala, NGOs have rallied against hydro
development. There, this clean form of electricity is seen as a disturbance to
locals and equated to mining as both industries involve foreign developers and
disrupt local communities and environments. Therefore, there is a strong
movement against both hydro and extractive industry development that is led
by the group Madre Selva in Guatemala City. This NGO has drawn the atten-
tion of other NGOs in Europe to support its causes [19]. This opposition has
grown so strong that now NGOs will sometimes oppose a project simply based
on its type as being hydro even if there is nothing in particular about the
project that is environmentally or socially damaging. Peru, on the other hand,
has had little resistance to new hydro projects because environmentalists have
targeted their efforts on the mining development sweeping the country [20].
Guatemalan environmental groups have lumped together hydro and
mining companies because the issue of privatization and increased trade liber-
alization, with adoption of policies such as the Central American Free Trade
Agreement, is very controversial. The debate over privatization has tended to
polarize people. Those who support private investment tend to think it brings
efficiency and lower prices to the consumers while those who support more
governmental control think that privatization only benefits the wealthy and
leaves the poor without money to pay for newly privatized services, such as
water and electricity, that are basic needs. This debate has caused some to
demonize hydro facilities and all private development because of its connection
with foreign private investment [19]. More details about the electrical sector
privatization experiment and its results in each country are described in the
country-specific chapters.
Developers claim that communities are extorting them to get their way.
And often developers would rather appease this extortion by paying a bribe
rather than have their project delayed and revenues forgone. Developers claim
that they often have to build schools and bridges, provide free electricity and
satisfy other bribes in order to develop their projects. International environ-
mental groups, they contend, are only involved in the hydro development
because they want to stall the project, demand money for the community, and
benefit from part of these proceeds [21].
The location of many excellent hydro resources in protected parks or indige-
nous territory provides environmentalists and human rights groups with
compelling legal arguments against development. In Ecuador, the Environmental
Impact Statement for Hidro Victoria was complicated and took longer than
expected because part of the tubing for this run-of-river project passes through a
buffer zone on the outside of a national park. Developers needed a presidential
decree that said that the project was necessary for the stability of Ecuador’s
electrical grid in order to gain access to this buffer zone [22].
70 BARRIERS
Landfills
Landfills and dumps can create special social problems as people who once
scavenged the garbage are suddenly left without jobs. Usually, landfill gas
capture coincides with the technical closure of the plant. So, the scavengers
would not have a source of income anyway as the site is covered with dirt and
a plastic liner regardless of whether the project was retrofitted for landfill gas
capture and made eligible for CDM revenues. However, scavengers are apt to
blame the entity developing the project or technical closure for their lack of a
livelihood.
Sometimes these people are legally contracted by the site operator to help
recycle garbage. Most often, though, scavengers are self-employed by gathering
material for resale or recycling and live close to the site. In Managua,
Nicaragua, hundreds of scavengers live around La Chureca dump. Locals
living on the site were offered new homes in different parts of the country after
Hurricane Mitch ravaged the country in 1998, but many of these scavengers
chose to sell the house and return to the job they knew at La Chureca. There
are two exploratory wells on the site monitoring the possibility of gas capture,
but trying to develop the site would inevitably lead to conflict [23].
Managers of Río Azul landfill in Costa Rica have had locals living around
the site enter illegally at night to cut and steal the plastic tubing that carries the
methane from the trash to the power house. Plant engineers hypothesize that
some of this theft has resulted because the people who were employed to sort
the trash have been out of work since a temporary technical closure of the
plant began during the summer of 2007 [6].
In Colombia, the social experiences with developing municipally owned
landfills have been mixed. MGM International tried to develop sites in
Barranquilla, but found that many scavengers lived on the site. Because the
local environmental authority mandated that the company provide alternative
sources of income for these people, MGM proposed that a percentage of the
CERs go to a recycling centre where the people would work since they are
already masterful sorters. However, the project is currently at a standstill [24].
Interaseo of Colombia, on the other hand, has had no problem developing
its privately owned landfills for methane capture. This firm refuses to pay
scavengers or make other concessions for the community and uses Decree 1713
of 2002, which prohibits scavenging, as its legal backing [25].
Possible remedies
Community resistance to projects in many cases results from a lack of social-
ization whereby the project, its goals of producing electricity and, in the case of
the CDM, producing emission reductions and sustainable development, are not
clearly articulated to community members. The project developers that had the
most success with hydro projects in general were those that attempted to have
a direct and frequent dialogue with the community [22]. Making sure that
communication and verbal agreements with communities are clear may involve
SOCIAL BARRIERS 71
hiring translators and/or spending enough time with the community to be

considered trustworthy. Having community members sign documents that they
cannot read can lead to confusion on the part of both parties about what is
expected and delivered. It is also important to note here that not all hydro
projects experience resistance from the community. In cases where project
developers experienced community opposition, it is essential to investigate
which procedure the project developer followed for implementation of the
project and compare it to case study examples documented by entities like
Sandia National Laboratories that show successful project implementation
[26].
Some project developers have proposed creating a matrix that shows the
required remunerations for development to ensure an equitable negotiation for
both the company and locals [27]. Standardizing the benefits that the commu-
nity earns would help prevent communities and companies from being taken
advantage of in the negotiation process. However, creating this matrix is
complicated since each project has singularities that need to be considered
individually. There is a need for clear education and frequent communication
about project effects on communities to improve the tense relationship between
locals and developers. These solutions for community involvement could also
be applied to landfill gas capture projects to mitigate the social concerns of
scavengers who will be left without jobs.
Companies in Costa Rica have begun addressing these concerns by encour-
aging companies to comply with the International Standards Organization’s
14,000 certification series for environmental responsibility [27]. Panama has
taken a different approach by proposing a law that requires 20–30 per cent of
the CERs generated to go to community development [28]. Colombia offers a
35 per cent income tax deduction on the project if 50 per cent of the CERs are
reinvested in community development [29].
Hidro Victoria of Ecuador has solved the social problem by having the
community have an equity stake in the project. The community will own 25
per cent of project. The Canje de Deuda of Spain is paying for this equity stake
and cancelling some of Ecuador’s debt to Spain in exchange for having the first
rights to buying the CERs derived from the projects. The total equity stake
comes to $2.2 million at the start of the project. The community is very satis-
fied with this agreement and has been assured that the water from the
run-of-river application will be returned to the river, on which they rely, before
it reaches the community. The active environmental community in Ecuador has
not protested against this particular project [22].
Empresas Varias of Medellín, Colombia, has resolved the landfill social
problems for the Curva de Rodas site they hope to develop by asking a local
university to partner with them. Empresas Varias, who operated the landfill
until 2003 and was responsible for the technical closure, has given money
many times to try to help compensate people for living near a landfill, but the
money sometimes filtered through the municipal government and did not
actually benefit the locals. Therefore, Empresas Varias was sceptical that it
72 BARRIERS
would be able to undertake a transformation of the site that required the

community’s approval. Empreas Varias decided to have the Antioquia
University help them with the CDM project cycle and community relations
because this school has a reputation of being of and for the people and could
use the CDM revenues as a social investment since it has many students from
the lowest social classes (1 and 2), which Colombia categorizes to structure
cross incentives and pricing differences for utility payments. This selection
has helped give credibility to mediators, and university students and faculty
from an interdisciplinary committee of anthropologists, sociologists and
engineers have had successful experiences talking with the community. All of
the money the university earns from this project will be invested in research
projects of this public education facility. Using a carbon broker like MGM
International, which has a large presence and office in Medellín, may have
lent more expertise to the project, but, in general, locals are suspicious of
companies. The Antioquia interdisciplinary group has specified in a contract
that 5 per cent of the CER revenues that will be generated will be reinvested
back into the community for construction of new roofs, a soccer field and a
bus stop.
While these examples of resolving social problems can serve to guide future
project developers, they will not be able to address all future community
relations problems. The individual nature of each project will necessitate
careful consideration of the appropriate steps to take to avoid conflict.
Conclusion
A variety of social problems ranging through stolen electricity, site security,
land deeds and community resistance jeopardize CDM project success. In
particular, hydro and landfill projects tend to raise the most social issues. As a
result of recent societal integration problems, a variety of creative solutions to
these problems have been pioneered for individual projects.
Note
1 These communities can also be educated to protect these watershed zones as is being
done by Fundación Defensores de la Naturaleza in Guatemala [30].
References
Latin America and the Caribbean 1995–2005’, World Bank, Washington, DC
2 Castillo, D. (2007) Interview with D. Castillo, President of ERD Consultants, 18
3 Carrión, R. (2007) Interview with R. Carrión, CONELEC Administrator in
Planning, 26 October, Quito, Ecuador
Quito, Ecuador
SOCIAL BARRIERS 73
5 Bueso, C. (2007) Interview with C. Bueso, Coronado Hydro Site Engineer for
7 Mekler, J. (2007) Interview with J Mekler, Project Developer for COMEXHIDRO,
15 August, Mexico City, Mexico
8 Gottfried, P. (2007) Interview with P. Gottfried, Project Manager for Fuerza Eólica
of Mexico, 17 August, Mexico City, Mexico
9 Ley, D. (2007) Interview with D. Ley, United Nations Consultant for Economic
Commission for Latin America and the Caribbean, 16 August, Mexico City,
Mexico
11 Harmon, G. C. (2007) Interview with G. C. Harmon, Santa Rosa Project
Developer, 7 November, Lima, Peru
12 Castaneda, R. (2007) Interview with R. Castaneda, Designated National Authority
of Guatemala, Ministerio del Medio Ambiente y Recursos Naturales, 3 September,
Guatemala City, Guatemala
13 Mayin, C. A. M. (2007) Interview with C. A. M. Mayin, Presidente Patronato, 13
September, San Esteban, Olancho, Honduras
14 Nathan Associates (2006) ‘Integrity in Bangledesh’s rural electrification’, prepared
for USAID, April, p5
15 Ley, D. (2006) ‘Solar power meets rural energy needs in Guatemala’, Sandia
National Laboratories
16 Ley, D. (2006) ‘Using renewable energy to promote ecotourism’, Sandia National
Laboratories
17 Johnson, B. R. (2007) ‘Chixoy Dam legacy issues study’, available from
http://shr.aaas.org/guatemala/chixoy/chixoy.htm
18 Reyes, D. (2007) Interview with D. Reyes, Acción Ecológica Director of Hydro
Project, 26 October, Quito, Ecuador
19 Conde, O. (2007) Interview with O. Conde, Representative from Madre Selva, 6
September, Guatemala City, Guatemala
20 Melindo, M., Armas, H. and Reyes, J. O. (2007) Interview with M. Melindo, H.
Armas and J. O. Reyes, Ministerio de Energía y Minas, Unidad de Electrificación,
21 Riviera, A. (2007) Interview with A. Riviera, CEO and President of Groupo
Riviera, 7 September, Guatemala City, Guatemala
22 Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria project developer, 28
October, Quito, Ecuador
23 Cinteno, M. (2007) Interview with M. Cinteno, La Chureca Site Manager for the
City of Managua, 19 September, Managua, Nicaragua
24 Gonzalez, M. (2007) Interview with M. Gonzalez, Carbon Consultant for MGM
International, 19 October, Medellin, Colombia
25 Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo,
16 October, Medellin, Colombia
26 Smith, B. G. and Ley, D. (2009) ‘Sustainable tourism and clean water project for
two Guatemalan communities: A case study’, Desalination (in press)
27 Alvarado, M. (2007) Interview with M. Alvarado, President of Asociación
Costarricense de Productores de Energía (ACOPE), 25 September, San José,
Costa Rica
74 BARRIERS
28 Días, F. (2007) Interview with F. Días, Comisión de Política Energética, Ministerio

de Economía y Finanzas, 5 October, Panama City, Panama
29 Fernandez, O. (2007) Interview with O. Fernandez, Departamento de Generación
de Empresas Publicas de Medellín, 18 October, Medellín, Colombia
30 Ley, D. (2008) Interview with D. Ley, Former United Nations ECLAC Consultant,
30 April
4
Financial Barriers
Financial barriers stem from a variety of areas that include general renewable
energy project problems, country instability due to a turbulent political and
economic climate, institutional rigidity and low Certified Emission Reduction
(CER) prices in general and especially as offered by international development
banks, and a host of Clean Development Mechanism (CDM)-specific
problems.
General renewable energy project problems

Renewable energy projects are unique in their demands on project financing
because of the feasibility studies necessary, the long payback of the projects due
to the high initial project costs, and the perception of high risk for some
technologies.
Expensive feasibility studies must be undertaken to choose the proper site
for development. These studies consist of a resource assessment and initial
environmental impact reports. This stage of the project development is consid-
ered pre-investment and may or may not be repaid, depending on whether or
not the project is developed. It is usually taken on by the company interested in
development with the hope that capital invested during this time will be recov-
ered through the operation of the plant. However, in countries with significant
political risk, this investment is lacking and prevents projects from even being
considered.
Also, project developers can struggle to secure financing since renewable
energy projects tend to have a long payback time before the high capital costs
will be recovered. (See Table 4.1 for an overview of the levelized and invest-
ment costs of renewable energy versus the levelized cost of conventional
energy. Generation costs include the initial cost of investment and fuel whereas
the investment costs only take into account the first costs of the system.)
Typically, an acceptable internal rate of return on a project is 25 per cent;
however, investment funds will occasionally not accept lower than a 30 per
cent return on investment [1]. This translates into approximately a four to five-
year payback. Hydro projects will sometimes have up to a ten-year payback.
76 BARRIERS
Table 4.1 Investment and average generation costs for

various energy technologies
Technology Average generation costs Investment costs

(US ¢/kWh) (US $/Watt)
Natural gas combined cycle 3.5 0.6
Coal 4.8 1.2
Nuclear 4.8 1.8
Wind 5.5 1.4
Biomass 6.5 2
Geothermal 6.5 1.5
Small hydro 7.5 1
Photovoltaic 55 7
Source: Altomonte, H., Coviello, M. and Lutz, W. F. (2003) ‘Energías renovables y eficiencia energética en America
Latina y el Caribe: Restricciones y perspectivas’, ECLAC – Division of Natural Resources and Infrastructure, October
The reason these projects are still pursued is that they can operate for over 100
years and recover the costs of investment over a long period of time. Because of
these special circumstances, renewable energy projects will often need a long-
term Power Purchase Agreement (PPA) of up to 20 years to get financing. This
agreement will ensure to the bank that the project owners have off-takers that
will purchase the electricity for a set price [2].
Usually power producers are free to make these PPAs with large
consumers, but some countries do not permit it. There is currently no whole-
sale electricity market in Nicaragua. All private generators must have PPAs
with the former state-run, but now privatized national utility, Empresa
Nacional de Electricidad [3]. Honduras is much the same with no wholesale
market and only the state-run Empresa Nacional de Energía Eléctrica (ENEE)
as the sale option for independent power producers. Prices that ENEE offers
are based on node prices or competitive bids if generation is solicited [4].
Panama has a restriction on PPA length of previously four and now ten years
[5]. The necessity to use a PPA is particularly key for countries like Uruguay
that have low spot market prices because of the large hydro portion operated
by the state utility on the grid. Power producers can command a higher PPA
price than the spot market if they guarantee availability of the power. However,
this promise is often impossible for intermittent renewables and can lead to
penalties if the power expected is not produced.
Power producers in Mexico are free to arrange PPAs, but they must be
structured so that the off-taker has at least a 1 per cent share in the power
producers’ operations. Also, the power producer must pay from 15 to 30 per
cent of the price negotiated in the PPA to the state utility as a transmission
tariff [6].
Small projects are at a disadvantage in this process since conducting a feasi-
bility study, the bank loan request process, and permit requirements all must be
completed for both small and large projects, and these stages take a similar
amount of time for both small and large projects. The revenue and CERs that
FINANCIAL BARRIERS 77
can be generated are proportionally less. These barriers and specific provisions
that countries have made to overcome them are discussed in more detail in
Chapter 8, ‘Small-Scale Barriers’.
Political/financial instability
The stability of a country’s economy and politics has a large bearing on
whether or not foreign investors will be enticed to invest in the country. Often
the reputation a country may have from past political conflict or economic
strife is not merited. However, the country’s misfortune often creates such a
bad reputation that it will suffer from a lack of investment even after it has
recovered.
Colombia is a prime example of a country with tremendous CDM project
potential but a violent past because of drug-related trade, and the perception of
an unstable economy may be limiting project development. In reality,
Colombia’s economy is and has been strong, with an average growth rate of
4.5 per cent annually for the last 25 years. This sustained growth is unprece-
dented in Latin America and is due to its diverse economy, liberalized trade,
high investment rates, low government spending and conservative debt
management. During this time of growth, Colombia did experience one year,
1999–2000, when the economy declined 4.5 per cent and unemployment grew
to 20 per cent. Since 2002, President Alvaro Uribe’s policies have helped the
economy begin to recover and improved the country’s image [7]. Uribe’s
leadership helps Colombia rank ahead of Argentina, Bolivia and Ecuador in its
short-term political risk. Since President Uribe’s second term is nearing its end
and no clear successor is in sight, however, Colombia has a less favourable
long-term political rating [8]. This long-term negative political rating and its
well-publicized violent past due to the drug trade could be preventing
Colombia from realizing its potential with regard to CDM projects given its
relatively industrialized nature and sustained economic growth [9]. As of
February 2008, only ten projects had been registered [10].
Nicaragua is another country that struggles from a lack of interested
foreign investors and as a result hosts only three CDM projects. The country’s
war-torn past, and political instability which often consists of corrupt adminis-
trations and a lack of continuity from one government to the next, have led to
the current situation. Nicaragua is a prime example of a country that needs the
state or an international bank to develop some CDM projects in order to
promote private investment. However, Nicaragua cannot always get loans
from these banks since it periodically maximizes its limits on debt [11].1
Argentina is in desperate need of renewable energy capacity additions, but
hosts only three renewable energy CDM projects because of the economic crisis
of 2001–2002 that left the peso devalued by 30 per cent. The once booming
and open economy suddenly became more closed as the government began to
regulate the price of electricity to protect customers, and foreign investors
began to withdraw from making investments.
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Ecuador had a similar economic collapse in 1998–2000. Inflation

rose from 43 per cent to 91 per cent from 1998 to 2000 while the Sucre was
devalued 200 per cent in 1999. In 1999, unemployment doubled to 16 per cent
and the real GDP shrank 8 per cent. Debt rose from 64 per cent in 1997 to 118
per cent in 1999 [12]. This situation has caused the country to have minimal
foreign investment even though there are aggressive feed-in tariffs that offer
high, fixed prices for renewable generation. Even project developers that are
taking advantage of these tariffs, like the owners of Valdez sugarmill, do not
trust that the tariffs will always be available and have contingency plans for
sustaining profitable operations [13].
As a solution to the problem of attracting foreign investment, large devel-
opers like AES could creatively use a local company as a shield by investing the
capital necessary, but not associating the larger company’s name with the
project. Then, if the project fails, it is not the foreign company whose reputa-
tion is marred. In this situation, however, the foreign firm would still run the
risk of losing its financial investment in the project. This arrangement requires
a huge amount of trust on the part of the developer and a close relationship
between the local and foreign companies [1].
Low carbon prices

The overwhelming majority of project developers in the author’s interviews
said that the CDM, in and of itself, was not enough to stimulate project devel-
opment. In other words, the project would have to be financially viable
without CDM revenues to make sense. CDM revenues may add 1–2¢/kWh
(depending on the grid emission factor and other details). Carbon brokers like
3C claim that the project developers they work with earn an internal rate of
return (IRR)2 that is on average 1.5 per cent higher than without CDM
revenues [14]. This amount of money certainly entices project developers that
were going to develop a project anyway to attempt to earn CDM revenues. But
it is not, in the opinion of most developers, enough to have the CDM as the
driving force behind the projects [15]. Carbon brokers will claim that CDM
revenues make it easier to gain a loan for a project [14], but the risk involved in
the registration of a project and verification of its emission reductions means
that these revenues are uncertain. Banks’ distrust and unfamiliarity with the
Mechanism also hinder the process of having a project developed solely for the
prospect of emission reductions since most renewable energy projects have
high initial investment costs and require loans.
A United Nations Framework Convention on Climate Change (UNFCCC)
study on the impact of CERs on the IRR on renewable energy projects shows
how this IRR increases over time and with increasing CER prices. Table 4.2
below shows this analysis. These estimates show more optimistic impacts of
CERs on IRRs than the 1.5 per cent rate impact that 3C predicts. Of course,
the exact impact the CERs will have depends on the number generated, the
price per CER and the number of years that the CERs are issued [16].
Table 4.2 Incremental impact of the CER price on the internal rate of return
of the project (percentage per purchase period)
CER Price in USD 5 years 7 years 10 years 14 years 21 years Impact per
(Numbers (Numbers (Numbers (Numbers (Numbers unit
in %) in %) in %) in %) in %) in USD
5 0.5 0.6 0.8 0.6 1.2 3.16/MWh
10 1.0 1.4 1.7 1.4 2.3 6.33/MWh
15 1.6 2.1 2.7 2.1 3.3 9.49/MWh
20 2.2 2.9 3.6 2.9 4.5 12.65/MWh
Source: UNFCCC (2007) ‘Investment and financial flows to address climate change’, Background Paper, available
at http://unfccc.int/cooperation_and_support/financial_mechanism/items/4053.php
Often, developers mentioned that they did not trust that they could earn
the CDM revenues because of the complexity of the issuance process but were
trying for them anyway. Other developers interviewed were somewhat
unfamiliar with the Mechanism altogether but a carbon broker had
approached them and offered to do the paperwork in exchange for a portion of
the reductions generated.3 These admissions in interviews mean that many
renewable energy projects are not additional and undermine the purpose of the
CDM to reduce global greenhouse gas emissions.
As reduction targets become more stringent and carbon prices increase, it is
likely that the CDM will have more of an impact on project development. The
breaking point at which carbon prices will be high enough to promote
additional development is not an absolute. This price will be different as each
project developer’s standards for risk tolerance and IRR requirements vary.
Multilateral development banks

Multilateral development banks such as the World Bank, the International Bank
for Reconstruction and Development (IBRD), Inter-American Development
Bank (IDB), Central American Bank for Economic Integration (CABEI), the
International Development Bank, and the Corporación Andina de Fomento
(CAF) will often complete the CDM paperwork for no upfront costs. Of these
multilateral banks, the World Bank dominates CDM project development. Its
Carbon Finance Unit is divided into several project-specific funds. In these funds,
developers pool their investments to support a certain type of CDM project. The
number of funds worldwide, of the World Bank and other funds, has grown from
three in 2000 with capital of €351 million to 54 in 2007 with total funds of
€6250 million in early 2007 [16]. The World Bank funds include the Prototype
Carbon, BioCarbon and Community Development Carbon Funds. It also hosts
the Carbon Fund for the Europe Investment Bank, the Netherlands Europe
Carbon Facility for the International Bank for Reconstruction and Development
and Italian, Spanish, Danish and European funds [17].
Certain of these funds only provide loans only for municipalities and other
public entities in the host country. For the Prototype Carbon Fund, countries
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must be members of the Host Country Committee in order to submit projects

[18]. A separate division of the World Bank called the International Finance
Corporation can provide loans for private investors. Private investors can,
however, be involved in funds for public loans by being investors in the fund or
by submitting their projects for carbon credits through these funds [19].
The existence of these banks helped promote early CDM project develop-
ment. These banks were involved in offering loans for CDM-like projects that
promoted sustainable development prior to the Marrakesh Accords. They were
accustomed to structuring loans that provided up to 80 per cent of the project’s
first costs. Therefore, when CDM came about as a way to boost the revenues for
renewable energy projects, these banks were already familiar with these
projects, which pioneered the CDM project cycle. In this way, they were able to
offer their services before many of the carbon consultants existed. This position
of dominance in the market allowed CAF and the World Bank to pay low prices
for CERs and structure deals where the bulk of the carbon credits were taken in
exchange for negotiating the paperwork and/or offering the project loan. These
banks also offered low carbon prices because they were operating during the
early stages of the carbon markets when the price of carbon was uncertain. They
still offer prices that are below the prices offered by carbon brokers and often
enforce large penalties for not issuing the CERs promised [20].
Now that there is competition for CDM services, these banks dominate less
of the market share. However, many project developers continue to work with
these multilateral banks for a variety of reasons. In some countries, banks do
not understand the value of CERs and will not consider them for accounting
purposes [21]. The financial additionality criterion requires that the project be
unprofitable without CERs, and inclusion of these CERs in the pro forma is
often essential. Multilateral development banks that are familiar with the value
of CERs can offer loans to these projects that developers could not otherwise
get. Other developers choose these banks because they are bound to working
with approved entities like them by the strict rules of the municipality or state
that will own the generation facility [20].
The Public Utility of Medellín (Empresas Públicas de Medellín (EPM))
began pursuing CDM projects in 2001 and was discouraged by the low CER
price of $1 they were offered by CAF for their La Sierra fuel switching project.
Furthermore, CAF was going to take 43 per cent of the CERs generated as
payment for the CDM project cycle. EPM later chose to sell CERs to the World
Bank for the Jepirachí wind farm. The CER price and terms offered were not
favourable, but were the best option that EPM could secure at the time, which
was early in the life of CDM projects. Also, EPM chose the World Bank
because it was familiar with implementing a project on indigenous territory,
which was necessary for Jepirachí [22].
In the World Bank contract with EPM, EPM received $4.5 per CER, and
had to give $1 of each CER to community development. EPM constructed a
desalinization plant for locals, but was not put in charge of operating it. The
operation of the plant has been unsuccessful, and EPM is being held responsible
by the project’s Designated Operational Entity (DOE) for the failure because of
the way the Emission Reduction Purchase Agreement (ERPA) was structured.
The failure of the desalination plant has put the issuance of CERs for the wind
farm at risk. Therefore, EPM negotiated a new contract with the World Bank in
2007 that absolves EPM from the responsibility for the desalinization plant.4
Also, the new contract gives a slightly higher CER price of $4.72 and issues the
CERs to EPM sooner. However, the renegotiated contract requires EPM to put
even more of each CER into community development. In the new contract,
$1.22 of each CER must be reinvested into the community [23].
Beyond the unfavourable prices and terms offered, EPM found the World
Bank to be inflexible in its negotiations. Also, decisions took a long time since
both the World Bank and EPM are large, hierarchical institutions that require
many people to sign documents and approve changes and decisions. The delay
in EPM was often due to the unfamiliarity of supervisors with the CDM and
the time it took to educate them about the opportunity to earn CERs. Because
of the rigid structure of the World Bank and low prices offered, EPM looked
for a more competitive offering and has chosen to work with MGM
International on its most recent project, the La Vuelta/Herradura hydro facili-
ties. EPM negotiated a contract with MGM that pays $11.65 per CER, none of
which must be dedicated to community development [24].
Now that project owners have competition for their CERs, they can choose
a number of consultants to complete the CDM project cycle; they have multi-
ple buyers in Europe and Japan for CERs, and are able to earn more
competitive prices for CERs that are closer to the second European Trading
Scheme (ETS) price of ~ €20 (as of February 2008). Again, these banks are
utilizing their strong financial position to take advantage of a new market
niche, post-2012 CER prices. Since the Kyoto Protocol ends in 2012, these
banks are only offering about $4 for CERs produced during this time [25].
Most project developers are waiting to sell their CERs at the time of generation
to see if they can achieve a better price, but those projects that need upfront
capital from CERs are forced to accept these low prices.
There is an interesting future possibility for CDM project funding through
the World Bank’s proposed Climate Investment Funds (CIFs), which would
provide additional grants and financing for developing countries that address
climate change challenges. CIFs would be additional to existing Official
Development Assistance (ODA) and make strides towards reducing green-
house gases in the private sector and through policy reform. All of the CIFs will
be host country-led and created as an equal partnership between the imple-
menting entity and the host country. Two of these funds that have been formed
are the Clean Technology Fund, which focuses on the role of new technologies
as climate change solutions, and the Strategic Climate Fund, which would
provide financing for new approaches to address climate change. The Pilot
Program for Climate Resilience will be the first project under the Strategic
Climate Fund and will explore ways to promote adaptation to climate change
and be tied to the Adaptation Fund of the Kyoto Protocol [26]. Since no
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projects have yet been developed through the CIFs, their potential for CDM
projects is not yet known.
Direct sale to Annex I country

Other than working with a carbon broker or international bank, or attempting
to negotiate the project cycle and sale of CERs itself, a project developer now
also has the option of working directly with an Annex I country to transfer or
sell the CERs. These countries will often offer special terms to project owners
in exchange for the first right to buy CERs or a set CER price. Sometimes this
exchange will offer the project developer special incentives. For example,
Hidro Victoria in Ecuador worked with the Spanish Canje de Deuda by offer-
ing this entity the first right to buy the CERs generated from the project at the
market price. In exchange for this first right to buy, Spain is paying $2.2
million for the community close to the hydroelectric plant to own 25 per cent
of it and cancelling this amount of debt that Ecuador owes Spain [27].
Uruguay has also structured a deal with Spain where a portion of
Uruguay’s debt is cancelled in exchange for Spain having the first right to buy
the CERs from a 10MW wind farm that the Spanish utility Gamesa is develop-
ing [28].
The Netherlands aggressively moved towards using CERs to fulfil its
Kyoto reduction targets by creating the Certified Emission Reduction Unit
Procurement Tender (CERUPT) in 2001 with a $1.3 billion budget to facilitate
the purchase of CERs from developing countries. CERUPT has stimulated
many projects and offered a buyer for even more, but with the current
maximum price for CERs set at €5.5, it may not be able to offer competitive
prices in the second ETS.
CDM-specific problems
Some financial problems of the CDM process have come to light after several
years of experience with these projects. These problems relate to penalties for
not producing a certain number of CERs, questions of legal authority, language
barriers, price information and refinance schemes.
As mentioned in the previous section, there are occasionally clauses in the
ERPA that prevent CERs from being sold. In the case of EPM, the fulfilment of
community development was essential for project validation. More commonly,
these contracts contain penalties for not producing a certain number of CERs
just as utilities will often fine generators that cannot produce the promised
generation. These penalties are meant to protect the bank from having too few
CERs to supply to its buyers. Projects with uncertain technical aspects should
not have ERPAs that obligate them to produce a specified number of CERs
[29].
The undersupply of CERs has caused some banks and brokers to have a
steep learning curve. Ecosecurities’ stock plummeted by 50 per cent in the last
quarter of 2007 because the firm had fewer CERs than expected to supply
buyers at the end of the first ETS [30]. Now, banks, brokers and consultancies
are buying more CERs and from a wider variety of projects to cover this uncer-
tainty.
Within ERPAs, entities that are most often from different nations must
decide which country’s laws to abide by for issues related to the contract. This
simple choice can cause controversy as some project participants think they are
being discriminated against if their country is not chosen. Also, which language
is used in the ERPA and in discussions becomes problematic. In Colombia, all
lawyers are legally bound to work in Spanish for signed documents. Rules such
as this complicate and add expense to projects as multiple forms of documents
in more than one language must be prepared. Some of the CDM terms are also
unfamiliar to project participants even if the documents are in their native
language. Therefore, these terms must be defined and explained.
The prices for CDM projects can result in complication as well. The price
of a CER varies widely as explained in the background section of Chapter 1.
This variability is due to whether the CER is forward sold, whether it is sold in
a secondary market or through a broker, whether it is for pre- or post-2012
compliance, the type of project that it is generated from, the political risk of the
country where it is from and a host of other factors. As project developers try
to understand how much they should expect for the CERs, they are
sometimes led astray. Project developers at EPM explain how the Andean
Center for Environmental Economics (CAEMA) published projected Joint
Implementation (JI) Emission Reduction Unit (ERU) prices which were higher
than CER prices. The equivalent of the public utilities commission of Medellín
(Controlería of Medellín), who watches how the city’s money is spent, saw
these higher JI ERU prices, confused them with CERs, and consequently
audited EPM. The Controlería demanded justification of the low CER price
they were receiving from the World Bank and why the process was taking so
long [24]. Other, less sophisticated project developer who have even less little
contact with the carbon market than the Controlería de Medellín, do not know
whether they are being offered a reasonable CER price by brokers [25].
Now, interested project developers can utilize a variety of new tools to get
an estimation of guaranteed CER market value. Thompson Reuters Interactive
offers a free online service that indexes European Union Allowance (EUA),
CER and Voluntary Emission Reduction (VER) prices [31]. Barclays Capital
also offers a CER and EUA price index [32].
As companies try to maximize their profits and minimize their risk, some
have considered refinancing projects that qualified for CDM revenues under a
financial additionality scenario which did not include the new terms of a
refinance [33]. Lower interest loans can change the economics of a project
enough to make the CERs unnecessary for the survival of the project.
Refinance schemes have not been tested by the CDM rules and could place
projects in jeopardy of maintaining an annual flow of CERs [34].
84 BARRIERS
Conclusion
Renewable energy project developers face financial barriers from the general
obstacles of a long payback time, lack of bank confidence and a shortage of
money for feasibility studies. Specific country situations, such as policies that
restrict PPA length and political instability, further complicate the prospects of
attracting foreign investors and earning loans. Multilateral development
banks that understand the risks of renewable energy CDM projects can offer
project financing, but often do so in exchange for taking most of the CER
revenues by offering low CER prices or a small percentage of CERs for the
project owner. CDM-specific financial barriers like penalties for not produc-
ing the CERs promised, difficulty choosing the legal rules to follow for
enforcement of the ERPA, ERPA language barriers and asymmetric CER price
information create complex and confusing financial negotiations for project
developers.
Notes
1 It should be noted that despite this limit on debt, Nicaragua did receive a $32.7
million loan from the Inter-American Development Bank for strengthening the
electrical sector in December of 2007 [35].
2 The internal rate of return is the annualized effective compounded return rate that
can be earned on the invested capital or, in other words, the amount of return on
investment earned. It is often used to compare the investment to alternative
investments [36].
3 Specific references to project developers and projects are absent in this section to
protect the privacy of interviewed participants.
4 The failure of the desalination plant draws into question the merit of the community
development portion of this arrangement.
References
Quito, Ecuador
2 Altomonte, H., Coviello, M. and Lutz, W. F. (2003) ‘Energías renovables y eficien-
cia energética en America Latina y el Caribe: Restricciones y perspectivas’, ECLAC
– Division of Natural Resources and Infrastructure, October
3 Millán, J. (1999) ‘The power sector in Nicaragua’, in Profiles of Power Sector
Reform in Selected Latin American and Caribbean Countries, Inter-American
Development Bank, Washington, DC
4 Millán, J. (1999) ‘The power sector in Honduras’, in Profiles of Power Sector
5 de Gracia, R. (2007) Interview with R. de Gracia, Association de Servicios
Públicos, 5 October, Panama City, Panama
6 Mekler, J. (2007) Interview with J. Mekler, Project Developer for
COMEXHIDRO, 15 August, Mexico City, Mexico
7 Global Security (2008) ‘Colombia: Economic conditions’, available from
www.globalsecurity.org/military/world/colombia/colombia_briefing.htm
8 Business Monitor International (2004) ‘Colombia: Political risk under the micro-
scope’, available from www.fdi.net/bmi/bmidisplay.cfm?filename=
OEMO_20070913_146003_xml.html
9 Bettelli, P., Garcia, A. and Graviator, S. (2007) Interviews with P. Bettelli, A.
Garcia and S. Graviator, Designated National Authority en la Unidad de Cambio
Climático de Ministerio del Medio Ambiente, Vivienda, y Desarrollo Territorial,
12 October
11 Feinstein, C. (2008) Interview with C. Feinstein, World Bank Europe and East Asia
Department, former member of Latin American Department, 14 January
12 Ycaza, J. L. (Chairman of the Board of Directors of the Central Bank of Ecuador)
(2000) ‘Andean integration and dollarization: Some reflections about Ecuador’s
case’, 25 August, available from www.comunidadandina.org/ingles/press/speeches/
Ycaza25-8-00.htm
13 Corporación Andino de Fomento (2006) Ecoelectric-Valdez bagasse cogeneration
plant Project Design Document, UNFCCC, 16 June
14 Woods, R. (2008) ‘Renewable energy is booming in Latin America’, Business
News Americas, 6 May
15 Bongiovanni, Z. (2008) Interview with Z. Bongiovanni, SolFocus Project
Developer, 19 March, Palo Alto, California
16 UNFCCC (2007) ‘Investment and financial flows to address climate change’,
Background Paper, available at http://unfccc.int/cooperation_and_support/
financial_mechanism/items/4053.php
17 The World Bank Carbon Finance Unit (2008) ‘Catalyzing markets for climate
protection and sustainable development’, available from
http://carbonfinance.org/Router.cfm?Page=Home&ItemID=24675
18 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and
climate change considerations: An assessment of DNAs in Latin America and the
Caribbean’, 2 June, Inter-American Development Bank, Washington, DC
19 Baroudy, E. (2008) Interview with E. Baroudy, Manager of the BioCarbon Fund of
the World Bank, 21 March,
20 Manzano, I. (2007) Interview with I. Manzano, President and CEO of Manzano
and Associates, 1 November, Guayaquil, Ecuador
21 Garcia, D. (2007) Interview with D. Garcia, FONAM Energy and CDM Specialist,
Medellín, Colombia
23 Garizábal, C. (2007) Interview with C. Garizábal, Departamento de Planificación
Empresas Públicas de Medellín, 15 October, Medellín, Colombia
March, Cartagena, Colombia
26 World Bank (2008) ‘Proposed Climate Investment Funds’, 22 April, available from
www.worldbank.org/cif
27 Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria Project Developer, 28
October, Quito, Ecuador
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29 Streck, C. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in
legal and contractual issues’, at CDM Tech. 2007 21 March, Cartagena, Colombia
30 Carbon Finance (2007) ‘EcoSecurities’ woes prompt CER rethink’, 20 November,
www.carbon-financeonline.com
31 Thompson Reuters, Carbon Market Community
32 Barclays Capital (2007) ‘Barclays Capital launches first Global Carbon Index’,
news release, 6 December
Costa Rica
34 Godinez, G. (2008) Interview with G. Godinez, CDM Validator/Verifier for Det
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35 Inter-American Development Bank (2007) ‘IDB approves US$ 32.7 million for
Nicaragua’s electric system’, press release, 10 December
36 Business Dictionary, Internal Rate of Return (IRR), available from www.business-
dictionary.com/definition/internal-rate-of-return-IRR.html
5
Informational Barriers
One of the best explanations for the current distribution of Clean

Development Mechanism (CDM) projects is the access to information that
people have about opportunities to earn Certified Emission Reductions
(CERs). The distribution of projects tends to be clumped because project
developers sometimes only become aware of CDM opportunities after their
neighbour or colleague has become involved. The Designated National
Authority (DNA) office is charged with promoting CDM projects and does so
to varying degrees. The other main sources of information tend to come from
UN organizations, development banks, industry associations, non-govern-
mental organizations (NGOs), governmental laboratories, regional
organizations, carbon brokers and universities. Each of these sources of CDM
information dissemination will be discussed in turn. Another type of informa-
tional barrier exists for project owners who are not savvy in negotiating
Emission Reduction Purchase Agreements (ERPAs). This informational
barrier is discussed separately after the CDM information dissemination
agents are considered.
DNA office and other institutional support

The DNA office can prove to be both an aid and an impediment to CDM
projects. The United Nations Framework Convention on Climate Change
(UNFCCC) hoped to allow countries to maintain some autonomy in the CDM
process by giving this office the discretion to decide where it will be housed,
how it will be funded, the degree of promotion it will support and the defini-
tion of sustainable development it will apply [1]. The way in which this office
operates has managed to lower some informational barriers, while building up
other institutional ones.
Former CDM Executive Board member and CDM consultant Christiana
Figueres studied the DNA offices in each Latin American country and
concluded in 2004 that these offices are hindered by three important issues.
She explains that:
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(1) the environmental agencies are typically one of the weakest in

the array of governmental agencies; (2) they are perceived as
enforcers of rules and regulations that the private sector typically
resist; and (3) they do not have an entrepreneurial approach to
their operations. [1]
These issues remain in 2008, but cannot be easily remedied since the DNA
office has not been able to survive outside of the government where it receives
financing. Some DNA offices have attempted to integrate the private sector by
having a board of both private and public sector representatives. But this board
only advises the office and does not participate in its day-to-day functions.
DNA regulatory offices in the private sectors have all folded or been moved to
a governmental agency as they have not been able to continue to earn
donations or generate revenue to sustain their operations [1]. Beyond these
observations, the author recognized other challenges that these offices face.
The DNA office within each country is charged with both promoting and
assessing the sustainable development of CDM projects. The establishment of
this office is essential to hosting CDM projects. As of February 2007, only two-
thirds of Latin American countries had set up DNA offices and were therefore
eligible for project implementation [2]. At the other end of the spectrum, some
countries such as Ecuador and Peru took the promotion assignment seriously
and developed a separate office for stimulating CDM activities. Other
countries, such as Argentina and Mexico, have carbon funds that are meant to
help projects in the initial stages of the CDM cycle for free and then later
charge a fair amount of CERs for help creating the Project Design Document
(PDD) [3]. In Mexico, this fund is run by a division of Banco Commercial de
Comercio Exterior (BANCOMEXT) while in Argentina it operates on grants
from foundations [4]. The CDM promotion offices in Ecuador and Peru also
operate on grants and therefore may lack permanence [5].
The degree to which DNA offices successfully juggle both tasks of promo-
tion and regulation depends on the resources they are allocated. In general,
offices attempt to offer seminars for industry trade groups and the general
public to make them aware of CDM opportunities, have a comprehensive
website with general CDM procedures as well as the country-specific process
for approval, and pamphlets for developers on the status of the CDM in the
country. Also, the DNA can choose to accumulate a library of information that
can help project developers through the complex CDM project cycle. This
library may include regional baseline calculations, financial feasibility studies,
and project documents that have successfully proven additionality. Some DNA
offices or institutional bodies like those in some countries such as Ecuador, El
Salvador, Argentina and Colombia have even created a country baseline of
CO2 emissions to cut the project costs for small-scale developers who can use
this average in their PDDs [6 and 7]. Other countries such as Ecuador and
Uruguay have completed in-depth analyses, often with the help of external aid
organizations, of the opportunities and barriers for CDM projects within their
INFORMATIONAL BARRIERS 89
country [8 and 9]. While some DNA offices reach out to industries that could
take advantage of the CDM, other DNA offices are less aggressive or have so
few resources that they are barely able to respond to the requests that they
receive for capacity building workshops.
While the DNA office usually offers project support and guidance, it can
also pose significant barriers to project development. Eron Bloomgarden, a
consultant for Ecosecurities, contends that DNAs and their offices vary from
country to country; ‘they can be a partner in the CDM process or cause unnec-
essary delays’. DNA offices that do not have a separate office, fund or division
for promotion can find that the tasks of promotion and regulation are incom-
patible. How can a regulator objectively assess the sustainable development of
a project if that same person is supposed to be promoting these projects in his
country? This situation causes an implicit incentive to be lax on regulation
criteria. Critics of Peru’s promotion office, FONAM, claim that there is a
potential conflict of interest in having the director of the regulatory DNA office
also heading the board of FONAM [10]. However, countries that have not
even separated these offices face even more of a direct conflict.
The DNA offices of Colombia, Ecuador, Peru and Bolivia have created an
Andean Carbon Hub with information about key CDM information, each
country’s national CDM entities, the country’s CDM portfolio, and materials
prepared for the annual Carbon Expo in Europe [11].
As an extension of the promotion of CDM projects, a few DNA offices are
pursuing integration of CDM into national policies. Carbon management is
mentioned in Ecuador’s policy agenda. Honduras screens all new renewable
energy projects for CDM potential. Nicaragua’s DNA helped promote a
National Development Plan that includes small-scale renewable energy genera-
tion as a development goal. Colombia provides a tax exemption for project
developers that give 50 per cent of their CERs to community development.
Panama is proposing that 20–30 per cent of CERs go towards community
development and considers CERs when awarding local carbon credit revenues
[1 and 12].
Since the regulatory arm of the office allows the DNA to decide whether or
not a project fulfils the goal of sustainable development and no specific criteria
have been drafted for what constitutes sustainable development, there is the
possibility that the DNA would show preferential treatment to project partici-
pants that have provided money or other favours to the office and its
employees. Most countries interpret the sustainable development criteria to
mean that the project must be in compliance with local and national environ-
mental regulations; however, because of recent controversy over this task,
several countries including Argentina, Mexico, Peru, Uruguay, Colombia and
Chile have begun to adopt social, environmental and economic requirements
that the project must meet in order to contribute to sustainable development
[13].
If a country has not drafted sustainable development criteria, then DNAs
can expand the definition of this term and do an informal validation of the
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CDM project. In Argentina, the DNA initially rejected a project proposed by

Ecoinvest because the DNA considered the project to not be additional. When
the project was finally passed through the national process in a second submis-
sion, the validator and Executive Board of the CDM found the project to be
additional and registered it [14]. Critics of the Colombian DNA office claim
that it does a legal and technical analysis of the project when that is not its role
[15]. The Ecuadorian DNA visits each project site and taxes the CERs from the
project to cover the costs of this visit. However, there are no set criteria that the
DNA looks for in projects, and the DNA often must assess projects when they
are in the early stages of development [16].
Because the regulatory procedures are so different from country to country,
it is important for project developers to be familiar with the Letter of Approval
process in the host country. This process is usually found on the DNA-operated
national CDM website, if it is complex. Some countries have a series of up to
15 steps project developers must follow and require official letters of approval
in order to proceed with the project for carbon revenues. First a Letter of No
Objection is issued after the developer presents the office with a Project Idea
Note (PIN). Then, a Letter of Commitment is issued as the project is under
construction. Finally, the Letter of Approval is issued when the project is
accepted.
Host countries were given total freedom not only in the decision about
what constitutes sustainable development, but also about where the DNA
office is located within or outside of the government. Usually the DNA is
housed under the Ministry of the Environment or Natural Resources, but some
countries such as Ecuador and Peru have separate offices for the DNA [13].
Having the office located under another department may bring associated
benefits or complications. A benefit of not having the DNA housed in this
larger office could be that it is more efficient and has more streamlined tasks.
DNA offices like Peru’s that are housed in a larger environmental office
sometimes must complete greenhouse gas inventories for the country and
organize adaptation activities to climate change impacts [17].
Having the office outside of a larger energy or environmental ministry can
mean that it has a lack of contact between entities that must be in dialogue to
make a decision about the approval of a CDM project. This slow communica-
tion can delay projects’ approval processes, which then impacts the other parts
of the CDM project cycle and ultimately when the project can begin operations,
since it must achieve CDM registration before generating its first megawatt-
hour. Most countries set a time limit on the national approval process. However,
if the deadlines are approaching, the DNA office will often ask project develop-
ers for more detailed information that takes a while to track down and provides
a legitimate reason for the delay [18]. Delays in giving national approval also
stem from the understaffing of most DNA offices. In many cases, the office has
only one full-time staff member. Additional personnel serve to assess the techni-
cal aspects of projects. Often DNA offices are also tasked with national
greenhouse gas inventories and climate change adaptation tasks [1].
DNA offices have so much freedom in their creation and operations that
they can even tax the CER revenues from a project. In Bolivia, the DNA office
operates separately from the government but is overseen by a governmental
department. This office supports its operations by taxing the CERs between 15
and 35 per cent. The exact amount has not yet been decided [19]. Ecuador also
taxes projects, but the amount of CERs taken from projects is much lower at
3–6 per cent (depending on project size) and goes towards paying the costs of
evaluating the sustainable development of that project [16]. Promotion offices
in Ecuador and Peru are also considering taking a percentage of CERs from the
projects that they help, to sustain their operations [5 and 20]. The carbon
funds in Argentina and Mexico will take a portion of the CERs when they
eventually successfully develop PDDs [3 and 4].
Thomas Black of the Andean Center for Environmental Economics
(CAEMA) thinks that the restriction of giving a certain percentage of CERs
away weakens the additionality argument for a project. The financial addition-
ality argument should show that without the CERs the project would not be
economically viable. Therefore, if a significant portion of the CERs are taken
away from the project developer, then the project would have existed without
these additional revenues [21].
Other support networks

United Nations organizations
Most of the CDM analyses and reports, which analyse the CDM, provide
insight for prospective developers and assess how well the CDM is meeting its
goals, are sponsored by United Nations organizations. The two main organiza-
tions are the United Nations Development Programme (UNDP) and the United
Nations Environment Programme (UNEP). Independent of these organizations
are several climate change technology transfer programmes that have come
into existence as a result of UNFCCC negotiations.
The UNDP is concerned with the CDM because of its commitment to
helping developing countries address climate change. The UNDP helped
sponsor a study entitled ‘Engaging the Private Sector in Clean Development
Mechanism (CDM) Project Activities under the UNFCCC/Kyoto Protocol’.
The UNDP had spent $350,000 to $450,000 in Latin American capacity build-
ing by 2004. The UNDP has also published a CDM User’s Guide and helped
an online community of CDM-interested persons become acquainted with each
other through CDM-Connect [1]. The UNEP/Risø Centre, the World Bank and
UNDP helped co-sponsor a CDM Rulebook meant to provide a comprehensive
set of CDM legal rules that is organized and easy to navigate. Its sections quote
UNFCCC decrees and explain them for developers [22].
The UNEP has been involved in analysing the CDM, especially baseline
calculations and additionality arguments, since its inception. It has also
partnered with the Risø Centre on Energy, Climate and Sustainable
Development, which is sponsored by the Danish International Development
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Assistance and the Technical University of Denmark. The UNEP and Risø
Centre’s work has been focused on projects that are a part of the Capacity
Development for the CDM (CD4CDM). The CD4CDM project has created a
number of useful documents on topics such as CDM financing and pitfalls in
PDD writing. It also created a massive set of spreadsheets that show details
about current CDM projects and those in the pipeline and provides some
regional and project type analysis.
In addition to the efforts of the UNEP and UNDP, the UN promotes non-
CDM-specific renewable energy projects in its efforts to promote climate
change-mitigating technology transfer. In 1995 a coalition of Organisation for
Economic Co-operation and Development (OECD) countries and the
European Union (EU) established the Climate Technology Initiative (CTI).
Then after the 2001 Marrakesh Accords, the Experts Group on Technology
Transfer was established. Since then, the US implemented the Technology
Cooperation Agreement Pilot Project (TCAPP) from 1999 to 2001 and the
Climate Technology Partnership (CTP) in 2001. All of these initiatives seek to
work with host countries to identify, prioritize and implement useful climate
change-mitigating technology [23].
Development banks
There are a variety of development banks that are now interested in financing
and carrying out the CDM project cycle for Latin American projects. A full list
of these banks can be found in Chapter 4, ‘Financial Barriers’. Two banks in
Latin America stand out as providing exceptional capacity development for
CDM, the World Bank and Corporación Andina de Fomento (CAF).
The World Bank has supported CDM projects since 1999 when it launched
its Prototype Carbon Fund (PCF). Then, in 2000, a PCFplus programme was
launched with the mission of providing outreach, research and training. It has
also worked with DNAs in each country to help initiate the office and its
function. From 2001 to 2004, it dedicated nearly $1 million to this cause. The
World Bank (with the government of Sweden) also sponsored the National
Strategy Studies Programme, which assesses CDM potential and challenges on
a country-by-country basis [1].
CAF is a regional developmental bank established in 1970 with the mission
of promoting sustainable development and economic integration in the Andean
and Latin American Regions. Sustainable Development for the Americas
(CSDA) and carbon consultant Econergy International raised and donated €40
million for CAF to create a Latin American Carbon Programme (PLAC) to
help CAF shareholder countries participate in the CDM. Through the
CAF–Netherlands CDM Facility, CAF became the first regional bank to be a
secondary CDM buyer and seller. CAF has also sponsored the operation of the
DNAs in Colombia, Ecuador and Bolivia [1].
Development banks have also begun to be involved in the quest for climate
change solutions by showing preference for projects that help mitigate green-
house gases. The Inter-American Development Bank (IDB) created a
Sustainable Energy and Climate Change Initiative (SECCI) in March of 2007.

The goal of this initiative is to support the Latin American and Caribbean
region in finding economically and environmentally sound energy solutions.
SECCI focuses on financial solutions and will complete its task by helping
renewable energy and energy efficiency projects in achieving financing, remov-
ing institutional barriers, promoting novel policy ideas, making sustainable
energy investment and financing tools more mainstream and accessible, utiliz-
ing the carbon finance market, addressing adaptation needs and forming new
partnerships with both the public and private sectors [24].
The World Bank has several proposed Climate Investment Funds (CIFs),
which would provide additional grants and financing for developing countries
that address climate change challenges. CIFs would be additional to existing
Official Development Assistance (ODA) and make strides towards reducing
greenhouse gases in the private sectors and through policy reform. All of the
CIFs will be host country-led and created as an equal partnership between the
implementing entity and the host country. Two of these funds that have been
formed are the Clean Technology Fund, which focuses on the role of new
technologies as climate change solutions, and the Strategic Climate Fund,
which would provide financing for new approaches to address climate change.
The Pilot Program for Climate Resilience will be the first project under the
Strategic Climate Fund and will explore ways to promote adaptation to climate
change in conjunction with the Kyoto Protocol’s Adaptation Fund. Whether or
not this preferred financing will jeopardize the additionality argument of CDM
projects is not yet known as none of the projects under these programmes have
applied for CDM revenues [25].
Industry associations
Industry groups in some countries can help complement the efforts of the DNA
office. For example, in Honduras, an active renewable generators association
called AHPPER (Asociación Hondureña de Pequeños Productores de Energía
Renovable) has helped provide information about CDM opportunities through
workshops and conferences. Likewise, Guatemala has an association called
AGER (Asociación de Generadores de Energía Renovable) that works mainly
with the small hydro developers. AGER is interested in the possibility of using
CDM revenues for its members’ projects, but does not have the capacity to
provide the CDM expertise for registering projects. Other associations such as
the Biomass Users Network do not think the CDM can be useful for its projects
because of the high CDM transaction costs. Table 5.1 below shows the renew-
able energy trade associations.
Non-governmental organizations (NGOs)

Beyond these trade organizations, there are NGOs that also help promote
CDM. For example, in Guatemala, Fundación Solar is involved in making
policy recommendations for renewable energy and has analysed the market
potential for Verified or Voluntary Emission Reductions (VERs) in the volun-
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Table 5.1 Major Renewable Energy Associations in Region
Country Associations
Mexico Mexican Wind Energy Association (AMDEE)
Asociación Nacional de Energía Solar
Red Mexicana de Bioenergía
Asociación Mexicana de Proveedores de Energías Renovables (AMPER)
Guatemala Asociación de Generadores de Energía Renovable (AGER)
El Salvador Asociación de Biocombustibles de El Salvador
Honduras Asociación Hondureña de Pequeños Productores de Energía Renovable
Nicaragua Asociación Nicaragüense de Promotores y Productores de Energía Renovable
(ANPPER)
Costa Rica Asociación Costarricense de Productores de Energía (ACOPE)
Financiamiento de Empresas de Energía Renovable de América Central (FERNA)
Biomass Users Network (BUN-CA)
Panama Asociación Panameña de Productores de Energías Renovables (APPER)
Colombia Federación de Biocombustibles
Federación de Cultivadores de Palma de Aceite
Peru Asociación Peruana de Productores de Azucar y Biocombustibles (APPAB)
Brazil São Paulo Sugarcane Agroindustry Union (UNICA)
Associação Brasileira das Indústrias de Biodiesel
Paraguay Red de Inversiones y Exportaciones (Rediex)
Uruguay Administracion Nacional de Combustibles (ANCAP)
Cámara de Productores de Biodiesel de Uruguay
Argentina Asociación Argentina de Energías Renovables y Ambiente (ASADES)
Cámara Argentina de Energías Renovables
Cámara Argentina de Generadores Eólicos (CADEGE)
Asociación Argentina de Energía Eólica
Central Federación de Energía Renovable en América Central y el Caribe (FERCA)
America and
Caribbean
Latin America Asociación Latinoamericana de Energía Eólica (LAWEA)
tary market [26]. (VERs are described in more detail in Chapter 8, ‘Small-Scale
Barriers’.) International NGOs like the Renewable Energy and Energy
Efficiency Project (REEEP) and Practical Action have also been involved in
helping to promote CDM activities in several countries.
National laboratories and governments

International collaboration also occurs through governmental labs like the
National Renewable Energy Laboratory (NREL), which with UNDP funding
mapped the wind potential in Oaxaca, Mexico and northern countries of
Central America and Cuba with the Solar and Wind Energy Resource
Assessment (SWERA). NREL was in conversation with the Ministry of Energy
and Mines in Peru to do a wind map of the country [27]. NREL, the World
Bank, the US Agency for International Development, US Department of
Energy, Winrock International and some private companies have also helped
create the Global Village Energy Partnership (GVEP) that has promoted rural
electrification with projects in Mexico, Guatemala, Honduras, Brazil, Ecuador
and Peru [28].
Sandia National Lab, with the help of Winrock International and New
Mexico State University, has helped pave the way for renewable energy in
Central America. Sandia has a strong interest in studying solar energy in
Mexico and initiated the Programa Cooperativo de Energía Renovable
(PROCER) between Mexico and the US and has done capacity building, pilot
projects and training in Central America with the Clean Energy and
Environment Programme [29].
A US Agency for International Development initiative called
Financiamiento de Empresas de Energía en Centroamerica (FENERCA) and
private company E+Co helped promote renewables in Guatemala, El Salvador,
Honduras, Nicaragua and Panama by providing capacity building and helping
to secure financing from 2000 to 2003 [30].
Regional organizations
A group of regional organizations also provide support for renewables by
completing pertinent studies. Organización Latinoamericana de Energía
(OLADE) covers the entire region and completes studies on energy statistics
and the potential for renewable energy. The Economic Commission for Latin
America and the Caribbean (ECLAC in English or CEPAL in Spanish)
completes studies assessing the potential and current political environment for
projects in all of Latin America. Within South America, the Andean Secretaries
Network has begun to show interest in renewable energy potential and
commissioned a study on the barriers to renewable energy CDM development
in Andean countries in late 2007.
Within Central America, there are several organizations that support both
renewable energy development and the CDM. The Consejo de Eletrificación de
América Central (CAEC) was created for regional grid integration in 1985.
The Comisión Centroamericana del Ambiente y Desarrollo (CCAD) was
formed in 1990 for the utilization of natural resources in the area to control
pollution [31]. The Central American Alliance for Sustainable Development
(ALIDES) provides political support for promoting renewables. The Central
American Integration System (SICA) has an Energy and Environment
Partnership (EEP) with Central America which is an initiative of the United
Nations World Summit on Sustainable Development of 2002. This system
provides non-reimbursable grants to project developers of the private sector,
communities, NGOs and the government for feasibility studies and pilot
studies for amounts from €20,000 to €50,000. By April of 2007, €3 million
had been distributed to 77 projects in the region [32]. In 2006, the Ministers of
Environment and Energy of Central America met and signed the ‘San Salvador
Declaration’, which provides instructions to create and support regional energy
and energy efficiency policies. The US is involved in an agreement called
CONCAUSA, a plan to avoid natural disasters like climate change. Currently,
there is a Plan Puebla-Panama (PPP) that aims to promote ecological and socio-
logical richness in the region through a major transmission interconnection
project [31].
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In addition to these regional organizations, there are several renewable

energy initiatives with ties to countries in other regions. The Latin American
and Caribbean Initiative for Sustainable Development set a goal of 10 per cent
renewable energy in the region by 2010. The Johannesburg Renewable Energy
Coalition in 2003 solicited the participation of 78 Latin American and other
countries to promote renewable energy. The REEEP conceived at the World
Summit on Sustainable Development in August 2002 has the backing of
national governments, businesses, development banks and NGOs and strives
to influence international, national and regional policy dialogues. The
International Energy Agency has a Renewable Energy Working Party to
reduce barriers for renewable technologies. The US has an Office of Energy
Efficiency and Renewable Energy within the Department of Energy which
supports 12 different programmes to facilitate renewable energy worldwide
[33].
University participation
Local university participation in CDM projects can offer an opportunity for
students to learn about the emerging carbon market as well as provide develop-
ers with more affordable help navigating the complex project cycle. The
University of Antioquia in Medellín, Colombia has begun helping the city of
Medellín with a feasibility study and PDD for a methane capture and flare
from a landfill called La Curva de Rodas. The students are working with Green
Gas of Germany to ensure that their work is consistent with the standards for
the UNFCCC. The university is also considering a Master’s level CDM
programme that would train students to be involved in the carbon negotiation
process. Graduating experts in CDM at the national level would provide
Colombia as a country with an advantage, as local project developers could
hire more affordable, local consultants [34].
Carbon broker interest and existence

CDM projects have also succeeded in countries where there are consultants
with offices. Usually, these consultants first set up operations and approached
project developers in a particular country because they saw opportunities
there. Then, after a few projects were completed, project developers in the
country began pursuing the carbon brokers. This situation occurred in Mexico
where AgCert first began converting hog farms for methane capture and
destruction. Then, Ecosecurities tapped into this market. Now, Mexico’s
governmental agency to promote agricultural businesses, Fidecomiso de Riesgo
Compartido (FIRCO) of the Mexican Agricultural Department, is investigating
the potential of these projects for development [35]. Potential projects near
carbon consultancy offices that specialize in developing CDM projects are at
an advantage as they will probably be approached by this group.
Once a consultancy has host country approval, and familiarized itself with
the country’s culture and renewable energy laws, it is easier to complete
another project in the same place. Also, some companies that have favourable
experiences with CDM begin to look for other ways to improve their
operations and earn CERs [21]. Additionality arguments in one PDD also
become easy to apply to another in the same country and industrial sector.
Therefore, the distribution of CDM projects is due in large part to the efforts of
the carbon consultants. It is no coincidence that Mexico has approximately
120 AgCert employees in the country and has therefore developed 56 methane
capture projects by February 2008, which accounted for 31 per cent of the
country’s CERs [36].
Emission Reduction Purchase Agreements (ERPAs)

Even if a carbon broker is located in a country and can offer its services to
clients, informational barriers can prevent these individuals from deriving the
maximum benefit from CDM. Like most legal agreements, the ‘devil is in the
detail’ when it comes to who truly benefits from ERPAs – which describe the
terms and conditions for the sale of the CERs. These legal documents are
typically 50 pages long, use economic terms unfamiliar to project developers,
and are in English. This barrier is especially high for local project developers
like hog farmers who are not exposed to the daily transactions of the global
and European trading schemes. These individuals have to seek out and pay for
help from lawyers, other carbon brokers, multinational banks or the local
DNA office. Often they are at a price disadvantage for CDM project costs since
they do not have multiple entities competing for their work. These folks also
suffer from a lack of experience and knowledge about how to structure an
ERPA in an advantageous way.
Since carbon brokers make a profit on the spread between the purchase
and sale price of CERs, there are many ways that the ERPAs can be structured
to shortchange the project owner. Hiring a lawyer to decipher what is best for
the seller is often too expensive. As a result, project owners can earn less
revenue than expected and experience delays in payments because of disputes
over when the CERs are delivered, non-compliance fees, the government
chosen to handle dispute resolution, which party communicates with the
Executive Board, and the price structure (fixed, floating or percentage) of the
CERs [37].
Mexican hog farmers inadvertently signed a contract with carbon brokers
that left them with no portion of the CDM revenues. This contract gave almost
all of the first ten years’ worth of revenues from CERs to the project developer
and carbon consultant in exchange for providing flare and biodigester equip-
ment. After that period, the farmers were under the impression that the CER
revenues would belong entirely to them. However, the carbon consultant opted
for the ten-year crediting period, which is non-renewable. After this time
period, another PDD and costly project cycle must be completed to earn
additional revenues. And the new baseline after ten years includes the existing
methane capture project. So, unless upgrades to the project are made, no CERs
will result after the first ten-year crediting period.1
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As a remedy to these ERPA contract asymmetries of information, the

UNEP and Risø Centre created a CDM Bazaar website in December of 2007
where CDM buyers and seller can find and directly contact each other. This
forum allows project owners to eliminate the carbon broker middleman step
where much money can be lost [38].
Also, in June of 2007, lawyers at Climate Focus and Lee International
created a generic ERPA in English, Spanish, French, Portuguese and Chinese
that project owners and CER purchasers can modify and use free of charge.
This project helps eliminate costly legal fees to draft these documents. Funding
for this project was provided by the Inter-American Investment Corporation,
which is a member of the Inter-American Development Bank Group [39].
Conclusion
There are a variety of entities from the country’s DNA office to UN organiza-
tions, developmental banks, NGOs, national laboratories, regional
organizations, industry associations, universities and carbon brokers that
support renewable energy and CDM activities. The distribution of these
organizations, their mission, how well they are run, and the resources
dedicated to their existence determine their effectiveness. Therefore, not all
countries and project developers have equal opportunities to learn about and
harness the potential of CDM. This situation helps contribute to an unequal
distribution of projects and can lead to poorly understood and unfair ERPAs.
Note
1 This information is not cited to protect the author and the parties involved.
References
Caribbean’, Inter-American Development Bank, Washington, DC, October
2 Michaelowa, A. (2007) ‘Fundamentals of programmatic CDM’, presentation at
CDM Tech Workshop, Cartagena, Colombia, 21 March
3 Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono,
20 November, Buenos Aires, Argentina
4 MacGregor, E. and Nienau, M. A. (2007) Interviews with E. MacGregor and M.
A. Nienau, Administrators of Fondo Mexicano de Carbono for BANCOMEXT,
5 Núñez, A. M. (2007) Interview with A. M. Núñez, CDM Coordinator in CORDE-
LIM, 23 October, Quito, Ecuador
6 Secretaría de Energía (2006) ‘Cálculo del factor de emisión de CO2 de la Red
Argentina de Energía Eléctrica’, Version 2007, available at
http://energia3.mecon.gov.ar/contenidos/verpagina.php?idpagina=2311, accessed
on 22 April 2009
7 Zapata, H. J. (2007) Interview with H. J. Zapata, Renewable Energy Coordinator
UPME, 10 October, Bogota, Colombia
8 Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de
Desarrollo Limpio en Ecuador: Un diagnostico rápido de los retos y oportunidades
en el Mercado de Carbono’, Banco Interamericano de Desarrollo and Ministerio
del Ambiente and Corporacion Interamericana de Inversiones
9 Unidad de Cambio Climático (2002) ‘Estudio de apoyo a la aplicación del
Mecanismo para el Desarrollo Limpio del Protocolo de Kioto en Uruguay’,
Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente, May.
10 Iturregui, P. (2007) Interview with P. Iturregui, Former DNA of Peru, 11
November, Lima, Peru
11 Oficina de Desarrollo Limpio de Bolivia, CORDELIM de Ecuador, FONAM de
Peru, and Ministerio del Medio Ambiente de Colombia (2008) Andean Carbon
Hub, available from www.andeancarbon.com/
13 United Nations Economic Commission for Latin America & the Caribbean (2006)
Study for the Fourth Meeting of the Economic and Society Working Group of
Forum for East Asia–Latin America Cooperation’, 7–8 June, Tokyo, Japan
International, 19 October, Medellín, Colombia
16 Cornejo, J. (2007) Interview with J. Cornejo, DNA of Ecuador in the Unidad del
Cambio Climático de la Comisión Nacional del Medio Ambiente, 25 October,
Quito, Ecuador
17 Gieseke, R. (2007) Interview with R. Gieseke, CONAM Designated National
Authority Office, 6 November, Lima, Peru
Quito, Ecuador
19 Trujillo, R. (2008) Interview with R. Trujillo, DNA of Bolivia, 16 April
21 Black, T. (2007) Interview with T. Black, Executive Director of CAEMA, 9
October, Bogota, Colombia
22 Baker & McKenzie, CDM Rulebook: Clean Development Mechanism Rules,
Practice, and Procedures, http://cdmrulebook.org/, accessed 28 March 2008
23 Kline, D.M., Vimmerstedt, L. and Benioff, R. (2003) ‘Clean energy technology
transfer: A review of programs under the UNFCCC’, Mitigation and Adaptation
Strategies for Global Change, vol 9, no 1, March 2004
24 Inter-American Development Bank (2008) ‘SECCI at a glance’, available from
www.iadb.org/secci/secciAtGlance.cfm?language=English
25 World Bank (2008) Proposed Climate Investment Funds, 22 April, available from
www.worldbank.org/cif
26 Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Foundación Solar,
7 September, Guatemala City, Guatemala
28 Global Village Energy Partnership International (2008) Latin America, available
from www.gvepinternational.org/where_we_are_working/latin_america
30 April
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30 US Department of Energy, Office of Policy and International Affairs (2002)

‘Increased use of renewable resources program for Central America’, from series
Energy and Water for Sustainable Living, paper prepared for the World Summit on
Sustainable Development, Johannesburg, South Africa, 26 August to 4 September
2002, available at www.pi.energy.gov/documents/EWSLcentralamerica.pdf
31 CEPAL and GTZ (2004) ‘Fuentes renovables de energía en America Latina y el
Caribe: Situación y propuestas de política’, 19 May
32 Coviello, M. F. (2007) Renewable Energy Sources in Latin America and the
Caribbean: Two Years After the Bonn Conference, United Nations Economic
Commission for Latin America and the Caribbean, Santiago
33 Coviello, M. F. (2003) Etorno internacional y oportunidades para el desarrollo de
fuentes renovables de energía en los países de America Latina y el Caribe, CEPAL,
Division of Natural Resources and Infrastructure, Santiago
Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 February
37 Streck, C. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in
legal and contractual issues’, presentation at CDM Tech Workshop, 21 March
Cartagena, Colombia
38 UNEP Risø Centre (2007) ‘CDM Bazaar’, December, available from
www.cdmbazaar.net/
39 Lee International and Climate Focus (2007) Certified Emission Reduction Sales
and Purchase Agreement (CERSPA), available at www.cerspa.com/sponsors.html
6
Host Country Institutional Barriers
Institutional support for the Clean Development Mechanism (CDM) and

renewable energy in general within host countries varies. Point Carbon priori-
tizes the ease with which CDM projects can be implemented in a variety of
developing countries for prospective investors [1]. This grading procedure is
determined by the country’s climate institutions, project status and potential,
and investment climate. The German Office of Foreign Trade does a similar
analysis for Latin America and shows Chile, Mexico and Brazil as being the
most desirable countries because of solid economic indicators, low corruption
and well-run Designated National Authority (DNA) offices that are open and
accessible [2].1
Table 6.1 Point Carbon’s international CDM host country rating
Country Rating
China A-
India A-
Chile BBB
Mexico BBB
Brazil BB+
South Africa BB+
Malaysia BB+
Korea BB+
Peru BB
Morocco BB-
Indonesia BB-
Argentina B
Vietnam B
Philippines B
Egypt CCC
Thailand CCC
Source: Point Carbon (2007) ‘CDM host country rating’, December, available from www.pointcarbon.com
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Table 6.2 Latin America’s top rated countries for CDM investment rated by
the German Office of Foreign Trade
Country Rating
Chile 91.8
Mexico 88.8
Brazil 85.0
Peru 79.3
Source: Umann, U. (2007) ‘CDM Investment Climate Index: Regional comparison’, German Office for Foreign
Trade and Deutsche Investitions, August
This chapter addresses why some countries have more favourable institutional
support networks than others by analysing trends and specific examples of the
energy policy creation process and its support for renewables. Political division
of energy tasks complicates the process of providing support for renewables
and the timely processing of requests. Abrupt changes in administrations that
do not provide continuity between the programmes of one government and
those of the next can also jeopardize long-term energy policy planning and
support. How and if the government has set up a market that is open also has a
huge bearing on the successful implementation of CDM projects. The DNA
offices’ role in promoting or inhibiting CDM is a key factor that can be an
institutional barrier. This topic is discussed in full detail in Chapter 5,
‘Informational Barriers’.
Lack of a long-term vision for energy policy

For many of these countries, creating energy legislation is a new phenomenon
that did not occur until these countries privatized the energy sector. Suddenly,
newly formed policy-making groups were responsible for creating laws and a
marketplace that instigated enough capacity additions to fulfil the demand of the
nation. Therefore, creating renewable energy legislation, like all energy policies,
has been a game of trial and error that has led to revisions and second versions of
laws in short succession. It has also created a piecemeal approach to most energy
legislation. The lack of comprehensive energy legislation means that most laws
are poorly coordinated with existing legislation. Sometimes an overlap of respon-
sibilities or neglect of tasks occurs. Each country has structured the energy
market completely differently. Honduras, Nicaragua and Costa Rica have
arrangements where the state company pays for generation but not capacity and
no wholesale market exists. In Guatemala and Panama, traditional Power
Purchase Agreements (PPAs) can be signed that provide both capacity and gener-
ation payments [3]. A detailed description of the renewable energy policy for
each country can be found in the country-specific section. In this chapter and
section, the author highlights just a few countries to illustrate the lack of long-
term policy thinking and the guessing game of structuring renewable policies.
The laws promoting renewable energy development in each country in the
region differ, but the trend in most countries is to provide exemption from
HOST COUNTRY INSTITUTIONAL BARRIERS 103
income taxes for first ten years of operation and exemption from import taxes
on generation equipment. However, each country tends to have its own method
of promoting renewable energy. And, since the recent rise in fossil fuel prices, a
flurry of new and revised laws have come into place to more actively support
the sector. However, frequent changes to the laws have provided an unsure
environment for investors as they try to navigate legislation that has not been
tested. For example, the tariff formula for private generators in Costa Rica has
changed three times since 1992 [4]. During the autumn of 2007, Mexico,
Honduras, Guatemala, Panama and Costa Rica were all in the process of
changing legislation to provide more aggressive incentives for renewable
energy. Chile and Argentina have new renewable energy legislation, and Peru’s
lawmakers are considering stronger renewable energy laws and passed a decree
for renewable energy promotion in May of 2008 [5].
Countries like Uruguay have begun to promote renewables in a quest for
new capacity additions. However, the 2007 elicitations for 20MW of biomass,
20MW of small hydro and 20MW of wind energy are hardly a long-term or
significant step towards promoting these technologies [6]. No hydro bids for
this call were made because the elicitation was not published in enough time
for the long process of initiating a new hydro installation to be completed. A
new call for 26.2MW of renewable energy was initiated by the governmental
monopoly, UTE, in early 2008 [7].
Brazil also elicited 3300MW capacity elicitations for biomass, small hydro
and wind in an Incentives Programme for Alternative Sources of Electric
Energy (PROINFA). Policy makers found that there was a lack of biomass bids
because the prices offered for these generators were better outside of the special
bid process. Brazil then had to revise the amount of biomass it expected from
the elicitation. In comparison with Uruguay’s tender, Brazil did have the
foresight to have two phases of its renewables programme. While the rules for
the second phase of PROINFA have not been finalized, the general notion is
that the required amounts of renewable energy will be more stringent [8]. This
second wave of renewables legislation provides interested developers and
investors with legislative certainty that there will be a market for these
technologies in the future.
Both Brazil and Uruguay’s renewable energy legislation does more than
just provide MW targets; it creates a local marketplace for the components by
requiring that a certain percentage be sourced locally. Beyond just promoting
renewable energy and investment from foreign companies, Brazil’s PROINFA
legislation requires that 60 per cent of the project components be locally
sourced [9]. The next phase of this legislation will most likely require a 90 per
cent local requirement [8]. Uruguay has a similar regulation to promote local
industry by giving locally produced technologies a 10 per cent advantage over
foreign firms with regard to winning renewable energy bids [7].
The trial-and-error method of energy policy is also evident in Chile. As of
March 2008, it requires its generators to source at least 10 per cent of their
energy from new renewable sources, excluding large hydro, for residential sales
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by 2024 [10]. The goal of this mandate is to help Chile promote capacity
additions that will ease its reliance on the natural gas supply from Argentina
that was recently cut. The 10 per cent mandate was made after two previous
laws (Short Law I and II), which lowered transmission and distribution tariffs
and other incentives for renewable generators, failed to promote development
[11]. Penalties for non-compliance with the mandate may help increase the
price that renewable generators are able to command.
The complicated nature of each country’s electrical sector and the changing
renewable energy legislation in the region are a challenge for project developers
who hope to operate in multiple countries. The table at the end of the country-
specific section provides a brief description of the laws currently in place in
each of the countries. In general, countries with a strong regulatory framework
for renewable energy, like Brazil and Chile, will be better able to promote non-
hydro renewables [12].
Political division of tasks

Other political barriers exist in the way in which the energy sector is organized
in the country’s government. Some countries like Panama have up to five differ-
ent governmental organizations which create tariffs, allocate environmental
and generation permits, provide CDM national approval and administer the
energy market. Most of the institutional bodies that are in charge of managing
the country’s market, regulating electricity tariffs, creating new energy policy
and handling rural energy development are new since the restructuring of the
market. These entities, therefore, may not know exactly how coordination
between entities should be handled on issues related to CDM and renewable
energy development.
Division of these tasks can sometimes lead to confusion as to who should
address a particular issue. For example, in Costa Rica, law makers recently
realized that Law 7200, which privatized the electricity sector, did not provide
clear guidance on who issues water permits. This ambiguity has stopped new
investment in hydro resources and closed about 30MW of generation from
various plants that cannot renew their water rights. A law to define who
should give this permit has been debated in the national assembly for two years
[4]. In Guatemala, no one owns the right to use water resources. Generators
simply ask permission for their use. Whether or not this permission is granted
is a process that is highly political and not based on a set of given criteria [13].
Abrupt and frequent administrative changes

An overarching political barrier facing countries today is the abrupt change of
administration in each country, which can paralyse efforts to realize a long-term
cohesive energy policy and renewable energy development. Often one set of
elected leaders cannot fulfil promises they made to their constituents who voted
them into office. Then these leaders are voted out of office in the next election
when their platform goals are not achieved or their administration is proven
corrupt.2 The population then chooses to vote for the opposite party candidate
with the hope that he or she will be an improvement. These radical changes
from one party to another cause governmental programmes to be dropped if
they are not consistent with the new party’s platform. Also, the change brings
about an evacuation of governmental employees and replacement with new
ones that are sometimes not qualified to be in the position, but were appointed
to the position because they have connections with the leading party [14]. The
change of administration every four or six (in the case of Mexico) years entails a
one year lull while new staff members become acquainted with policies, and the
last year of the term is dedicated to campaigning for the next election. Also,
investors are hesitant to become involved in new projects in the last year of a
term since there is little certainty for regulatory measures and the
political/economic stability of the country [15].
This upheaval wreaks havoc on the governmental offices where the DNA
resides and decides on individual projects’ fulfilment of the sustainable devel-
opment criteria. These offices are also meant to provide promotion of the
CDM in the form of information for the population and capacity building
seminars. When members of this office are replaced, all institutional memory is
lost and the new members start anew with no knowledge of the complex CDM
process. Honduras has suffered from this upheaval in 2005 and had the entire
DNA office replaced after the change in administration in 2005 [14].
Market openness to independent power producers

Even though there are new laws to promote renewable energy technologies, a
well-coordinated fleet of people handling energy policy, and political continu-
ity, are needed for CDM success; other political indicators must also be well
aligned in order to have successful project implementation. Costa Rica, as well
as Mexico, opened the market partially and now allows only limited private
sector participation. Private generators in Costa Rica comprised only 8.3 per
cent of the country’s generation in 1999 and by law can make up only 30 per
cent of the market [16]. Also, they have to wait until new capacity is solicited.
Then they can offer a bid, but it must be accepted by the state-run Instituto
Costarricense de Electricidad (ICE) before they can be assured that their gener-
ation will be bought. If the bid is accepted, the generator is then in a situation
of a monopoly where ICE is the only buyer; the generator must accept
whatever price ICE offers. Generators in Costa Rica cannot earn better sale
prices because they, by law, are not allowed to sell directly to large consumers
or the Central American grid (SIEPAC). These barriers explain why Costa
Rica, a place with political stability that has attracted much foreign investment
in other sectors like tourism, had only five registered CDM projects as of
November 2007.
A similar situation occurs in Honduras where generators can only sell to
the Empresa Nacional de Energía Eléctrica and must accept the payment this
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state-run company offers [14]. In Nicaragua, independent power producers

(IPP)s are limited to creating PPAs with the national utility [17]. In Belize, the
electrical sector is still completely controlled by the government and consists
mainly of hydroelectricity, which has shown no movement to utilize CDM. In
fact, the country has not yet even set up a CDM office. Therefore, those inter-
ested in renewable energy generation projects will usually choose to invest in
countries with a more open market, the presence of financial incentives and a
higher emission factor.
On the other hand, Chile and Guatemala have very open markets that have
succeeded in attracting many foreign and domestic independent power produc-
ers. In Chile the private sector controls 90 per cent of generation, and in
Guatemala it controls 50 per cent [18] and [19]. Obviously, more than just the
open electrical market lured investors and developers to these countries, but
having a marketplace that has few barriers to entry and allows for free market
competition does factor into the decision to develop. These experiences from
closed markets, as in Costa Rica, Belize and Honduras, and completely priva-
tized ones, as in Guatemala and Chile, show that open markets with few
barriers to entry for private generators are best positioned to take advantage of
CDM revenues. Entrepreneurs in the private sector are more apt to attempt to
navigate the complex CDM approval process in a country that has straightfor-
ward permit processes and welcomes development.
When the private sector does not get involved in CDM projects, there are
few prospects for project success. State-run generation companies have little
incentive to fumble through the CDM project cycle when they will be able to
recuperate costs from taxpayers regardless of the project costs. If these agencies
had to apply for revenues to reduce customer costs, then there would be more
state-initiated CDM projects. However, regulatory agencies, who oversee the
operations of state companies to make sure that they do not overcharge
customers with unnecessarily high rates because of poor energy investments,
currently do not mandate that state entities take advantage of CDM revenues
to reduce customer rates [20]. In some cases there is even a disincentive to
applying for CDM revenues; the Public Utility of Medellín (Empresas Públicas
de Medellín) was audited by the city committee that oversees how public
money is spent for trying to use the CDM because of the long delays it caused
in project development [21].
It is also difficult for state-run generation facilities and municipalities that
control landfills to develop projects because the process must be public. This
requirement can slow negotiations as various stakeholders and members of the
public present their opinion. State-run entities like ICE of Costa Rica may be
bound to certain financial rules that force them to accept the least-cost bid for
generation [20 and 22]. This requirement almost entirely excludes the participa-
tion of CDM projects since they, by definition, have to rely on carbon credit
revenues to exist and be considered additional. These state-run entities also
cannot freely invest in projects because, as a state entity, they must gain permis-
sion from the commission that oversees their activities and provide justification
for the investment [23]. Therefore, there is little incentive for state employees to
pursue the CDM except in rare instances. (A more elaborate discussion of finan-
cial and regulatory additionality problems stemming from institutional barriers
can be found in Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’.)
Other state-run generators have not pursued CDM because it goes against
the culture of the organization. Operators are used to serving the goal of
providing reliable electricity and aim to maintain the status quo. Navigating
complex international carbon markets and rules falls outside their jurisdiction
and interest. One notable exception is within the Empresa Nacional de
Electricidad (ENEL) in Nicaragua where Mario Torres is spearheading a direc-
tive to earn Certified Emission Reductions (CERs) for four hydro projects.
Torres, however, is an anomaly within ENEL and other state entities because
he previously worked for the CDM national approval office located within the
Ministerio del Ambiente y Recursos Naturales [24].
Conclusion
The institutional barriers of a lack of a long-term vision for energy policy that
incorporates renewables, closed electricity markets, disorganized political
divisions that complicate tasks essential for CDM project development, and
frequent and abrupt political upheaval may seem like insurmountable
challenges to project development. In general, laws created to promote renew-
able energy tend to be experiments, which have to be revised to produce the
desired results. Although renewable energy policies in many Latin American
countries have gone through a period of trial and error, they ultimately have
helped promote renewables, CDM development and, in the case of Uruguay
and Brazil, local industries.
Notes
1 This German study contradicts the experience of other energy professionals who
have encountered high levels of corruption in Mexico [15].
2 Some countries do not even allow for re-election.
References
1 Point Carbon (2007) ‘CDM host country rating’, December, available from
www.pointcarbon.com
2 Umann, U. (2007) ‘CDM Investment Climate Index: Regional comparison’,
German Office for Foreign Trade and Deutsche Investitions, August
3 Matute, L. J. (2006) ‘Incentivos a las energías renovables en Centroamérica’,
presentation at Forum ‘European Union Meets Latin America on Renewable
Energy’, Panama, 9–11 October
4 Villa, G. (2007) Interview with G. Villa, Director of Energy within Ministerio de
Ambiente y Energy, Costa Rica, 27 September, San José, Costa Rica
5 Business News Americas (2008) ‘President inks renewables promotion decree’,
Electric Sector, 5 May, www.bnamericas.com/news/electricpower/
President_inks_renewables_promotion_decree
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6 Kasprzyk, M. (2007) Interview with M. Kasprzyk, Designated National Authority

in the Ministerio de Vivienda, Ordenamiento, Territorial, y Medio Ambiente,
Division de Cambio Climático, 27 November, Montevideo, Uruguay
8 do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, Centro Clima: Center for
Integrated Studies on Climate Change and the Environment, available through
Renewable Energy Policy Network for the 21st Century at www.ren21.net/
pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy%20Policy%
5B1%5D.ppt
9 World Wind Energy Association (2007) World Wind Energy Award 2007 goes to
Government of Brazil for Proinfa Programme, 4 October
10 Reuters UK (2008) ‘Chile’s Congress approves renewable energy law’, 6 March
11 Ministerio de Economía Fomento y Reconstrucción (2004) ‘Ley Corto I: Regla
Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de
Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a
la Ley General de Servicios Eléctricos’, Diario Oficial de la República de Chile, 13
March
12 Woods, R. (2008) ‘Renewable energy is booming in Latin America’, Business
News Americas, 6 May
13 Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and
Promotion of Renewable Energy, Ministerio de Energía y Minas, 7 September,
Designated National Authority of Honduras, 11 September, Tegucigalpa,
Honduras
30 April
16 Millán, J. (1999) ‘The power sector in Costa Rica’, in Profiles of Power Sector
17 Millán, J. (1999) ‘The power sector in Nicaragua’, in Profiles of Power Sector
18. Millán, J. (1999) ‘The electrical sector in Guatemala’, in Profiles of Power Sector
19 Millán, J. (1999) ‘The electrical sector in Chile’, in Profiles of Power Sector
20 Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga,
Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25
September, San José, Costa Rica
22 Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of
Comision Regulatoria de Energía, 30 August
23 Delgado, W. (2007) Interview with W. Delgado, Project Developer for Companía
Nacional de Fuerza y Luz, 27 September, San José, Costa Rica
24 Torres, M. (2007) Interview with M. Torres, Project Planner for Empresa Nacional
de Electricidad of Nicaragua 19 September
7
UNFCCC Procedural and
Methodological Barriers
United Nations Framework Convention on Climate Change (UNFCCC) proce-

dural and methodology barriers for renewable energy Clean Development
Mechanism (CDM) projects fall into a variety of categories including the
following: an unstable CDM market; complications that arise from countries
having low emission factors and high levels of imported generation; misunder-
standing of CDM methodology; adjustments made to build and operating
margins and methodologies that do not promote the economic viability of
projects; changing CDM methodologies; conflicts with the regulatory and
financial additionality of projects; and the availability of carbon brokers and
Designated Operational Entities (DOEs) in each country. The barriers for
small-scale projects to earn Certified Emission Reductions (CERs) are many,
and discussed thoroughly in Chapter 8, ‘Small-Scale Barriers’.
Instability of the CDM market

The CDM market is unstable for several reasons. Firstly, it is a part of the
emerging carbon market that suffers from price fluctuations as the cost of
reducing carbon domestically is somewhat unknown. Also, the number of
allowances CO2 throughout the European Union (EU) has a huge bearing on
the price of CERs. However, the number of allowances that are excess or not
needed is unknown until the end of each trading period, 2007 and 2012. At
that point, the price of carbon can either skyrocket or plummet as it did in the
spring of 2006 when regulated entities realized there was a glut of allowances
on the market [1].
The number of CERs that will be generated from the developed projects is
also highly speculative since their generation hinges on the proper functioning
of the system. In July of 2007, Christiana Figueres and Ken Newcombe made
estimates for a paper published by the World Bank. The paper shows the total
CERs needed from the EU in the second trading scheme to be 1.25 billion by
2012 (1.25 gigatonnes of reductions). If other Annex I countries like Canada
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(but not the US and Australia) are included, the CERs needed would total 2.7
billion. In this second scenario with a need of 2.7 billion CERs, current pipeline
supply with no additional projects would approximately meet the need [2].
Another World Bank report by Karen Copoor and Philippe Ambrosi,
written in May of 2007, predicts that EU buyers (who make up the bulk of the
CER market), have fulfilled only 45 per cent of their demand for CERs and
Emission Reduction Units from Joint Implementation. Excluding potential
Australian, Canadian and US demand, they conclude that there is a remaining
demand of about one billion CERs and Emission Reduction Units from Joint
Implementation activities for the 2012 target, which is close to the
Figueres/Newcombe prediction of 1.25 billion CERs [3].
These estimates for future CER demand are difficult to predict for a variety
of reasons. Assumed project failure rate has a large bearing on the number of
CERs that will be available. The Figueres/Newcombe report which estimates
that demand, including all Annex I countries, would be met by current pipeline
projects does incorporate a failure rate [2]. The US Electric Power Research
Institute estimates that about half of the CERs that are expected to be gener-
ated will fail because projects are delayed, malfunction or experience other
problems, while other carbon market analysts assume project failure rates of
15–20 per cent [4 and 5].
Given the huge expected increase in CERs because of projects in the
pipeline, the level of success of these prospective projects will have a large
bearing on the number of CERs available. Figure 7.1 below shows the total
CERs that will be generated from already registered and pipeline projects
worldwide. This graph assumes that industrial gases will not be included in the
future supply.
45
Pipeline projects
40
Registered projects
35
30
Gtons of CO2
25
20
15
10
0
2017 2024
Source: Figueres, C. and Newcombe, K. (2007) Evolution of the CDM: Toward 2012 and Beyond, World Bank,
Washington, DC
Figure 7.1 CERs predicted without industrial gas inclusion

UNFCCC PROCEDURAL AND METHODOLOGICAL BARRIERS 111
CER estimates must make assumptions about the supplementary clause or

how much each country can use project-based CERs or Joint Implementation
Emission Reduction Units to fulfil its reduction targets [3]. Canada has set its
clause at 10 per cent of total reductions necessary while the clauses within EU
countries average 13.5 per cent, but vary from 8 per cent in the UK to 20 per
cent in Spain [4]. Each estimate could have used different average supplemen-
tary clauses.
These estimates of a flooded CER market or having a shortage of CERs
must be considered carefully because they assume that the US, Australia and
Canada will not have a significant demand for CERs. These predictions were
made before Australia’s recent move to ratify the Kyoto Protocol in December
of 2007 [6]. Also, with the domestic movement on both the east and west
coasts of the US to control greenhouse gas emissions, the US could have a
demand for CERs before 2012.
Beyond these complications of project failure rate, the supplementary
clause, and future country participation with CER forecasting, there are
regulatory and other uncertainties that make it difficult to predict post-2012
CERs generated. Many negotiators think that the industrial gas emissions will
not be allowed as valid reductions in the post-2012 regime since these projects
have raised several questions of whether or not they fulfil the goal of sustain-
able development. Which sectors will be regulated also places uncertainty in
these estimates. Aviation, shipping and vehicles are being discussed as potential
sectors for regulation in the EU. Inclusion of these sectors could greatly
increase demand for CERs [3].
Predictions about future CER demand have to make assumptions about
renewal periods after seven years and the success of projects’ ability to register
in these future periods. Also, estimates do not include new projects that are not
currently in the pipeline. Finally, these estimates mean little without knowledge
about what the reduction targets for each country will be and whether or not
the market will be flooded.
Another market uncertainty results from the unclear post-2012 Kyoto
obligations. Since most renewable energy projects require several years to initi-
ate and have long-term payback periods, developers are hesitant to take on
new projects that will generate CERs for 7 to 21 years, well into a time when
CERs may have no value. There are few post-2012 CER buyers. Offers from
the few buyers that exist tend to be low because of the uncertainty of reduction
targets and CER market saturation [7]. Until the rules are finalized, the CERs
that can be forward-purchased from projects in the pipeline will suffer from
low prices. Therefore, the market for CDM projects may decline significantly
in the coming years.
The instability of the carbon market causes confusion for project develop-
ers and investors. Having the value of and ability to obtain CERs being
uncertain prevents these entities from depending on their existence. This situa-
tion undermines the additionality of projects, as those that would occur in a
business-as-usual situation are the ones that are able to exist. When this occurs,
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CDM revenues act as additional profits for already financially viable projects,
but do nothing to promote marginally profitable projects.
Methodology confusion
As project owners, DNAs and carbon brokers have learned the CDM project
cycle through practice and some mistakes have been made. In Peru, one of
these mistakes caused the Paramonga Sugarmill to be denied registration. In
2002, the country’s Consejo Nacional del Ambiente (CONAM) or national
environmental office did an initial assessment that showed the project to be
small-scale based on its generation of less than 15MW. Then, the Andean
Center for Environmental Economics (CAEMA) wrote a Project Design
Document (PDD) based on this assessment, and the Det Norske Veritas
(DNV) validated the project. However, the CDM Executive Board rejected it
because the project had 85,000 annual emission reductions rather than the
required 60,000 for small-scale status. Confusion about this project arose
because the project was both a fuel switching and renewable energy project.
Fuel was switched from petroleum to biomass in a 15MW power plant. In the
early assessment of the project, the CONAM, CAEMA and DNV had all
incorrectly assessed the project size [8].
Undaunted by this experience, Paramonga is now considering bundling a
new project with this older project into one PDD [8]. However, this expecta-
tion may not be realistic, and based on incorrect CDM information. The
biomass plant of 2002 that Paramonga hopes to earn CERs for is already
operating. After 31 March 2007, projects that had already begun operations
were not eligible for registration [9].
Low emission factors

There is a bureaucratic barrier that results from CDM projects in countries
that have low emission factors. The CDM project displaces generation that
occurs within the country, and the amount of CERs produced is typically a
product of the megawatt-hour (MWh) generated times the carbon intensity of
the fuel used to produce the energy for the country in a business-as-usual
scenario. For countries like Costa Rica that have low national emission factors
(or CO2 produced per MWh generated) because 70 per cent of the country’s
generation is from hydro, fewer CERs are generated from a project that is the
same size as a project in a country with a higher national emission factor.
However, since Costa Rica’s main hydro sites have already been utilized, their
future electrical production to fulfil demand growth will most likely be fossil
fuel-based from imported fuels [10].
For countries with a generation portfolio and future fuel mix like Costa
Rica’s, perhaps baseline calculations should not be based on historical
emissions, but instead on predicted future emissions. Structuring the baseline
calculation on historical emissions punishes countries that currently have large
sources of clean energy and rewards countries that have developed with a
strong dependency on fossil fuels [11].
Imported energy
Imported energy can also cause a country to have an artificially low emission
factor since it counts as zero for the country’s emission factor [12]. It is essen-
tial to count this generation as zero because it would be difficult to track
frequent energy transactions across borders and then trace the source of
generation for each unit. Counting generation from other countries would
also mean that it would have to be subtracted from the host country’s
emission factor when calculating reductions made domestically. These calcu-
lations would add complexity to the already complicated process of
determining emission reductions.
Because there is no easy way to deal with this problem, countries with high
energy importation rates, such as Uruguay at 35 per cent and Ecuador at
10–14 per cent, suffer from earning fewer emission reductions [13 and 14].
Therefore, CDM projects in these countries are not as desirable.
Adjusting the build and operating margin

Sometimes carbon brokers try to earn more emission reductions for their
projects by adjusting the build and operating margin of their projects in the
baseline calculation. The operating margin refers to the emission factor of the
power plants on the grid, while the build margin refers to the emission factor of
the most recent capacity additions to the system. Typically, these two factors
are averaged together equally to create the baseline emission factor in tonnes of
CO2 per MWh of electricity produced. Renewable energy CERs are calculated
by multiplying the MWh of electricity the project produces by the emission
factor. For solar and wind projects, an operating margin of 75 per cent and
build margin of 25 per cent are used since these projects tend to correspond
with peak loads.1 All other projects use a 50/50 ratio for the build/operating
margin. Deviations from these standards must be justified as an exception to
the preferred method [15]. Whatever ratio of operating and build margin is
selected in the PDD remains for the life of the project, which is either seven or
ten years.
Carbon brokers and project developers will sometimes adjust these ratios
slightly to produce what they think will generate more CERs. However, an
adjustment that may yield more CERs in the current year may yield less in
future years. Since the emissions reductions are calculated each year to incor-
porate the most up-to-date and accurate numbers, changing the numbers can
produce an unexpected result. For example, in Colombia, La Niña years tend
to have more precipitation, allowing dams to run at full capacity. El Niño years
are drier and the country must rely on more thermal generation.2 Therefore,
arguing for a higher or lower percentage will not always give a project more
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CERs since the operating margin changes depending on the availability of

water in Colombia [16].
The operating and build margins can also differ depending on changes in
fossil fuel availability. Chile’s operating margin has changed in recent years as
the natural gas supply line was cut off from Argentina. Chile has had to retrofit
many of its plants that accepted natural gas to take fuel oil now. This change
has increased the carbon intensity of its operating margin fuel mix. Therefore,
weighting the build margin more heavily in Chile prior to this change would
have yielded fewer CERs [17].
Beyond fuel shortages, countries also may not be able to procure fossil fuel
resources because of ideological or political differences with their neighbours.
Chile refuses to grant Bolivia access to a Pacific port between the northern
border of Chile and southern border of Peru. Because of this conflict, Bolivia
refuses to sell natural gas to Chile [17].
Given the uncertainties in the build margin because of the price of fuels,
political climate of the country, and availability of water resources, most
carbon brokers choose to keep the recommended ratio.
Proposing new methodologies

Adjusting existing methodologies or proposing new ones to yield more CERs
can also produce unexpected results. The CDM was designed to be flexible
since new types of carbon reductions are being devised every day. This flexibil-
ity allows new methodologies to be proposed. In Chile, the project developers
of Chacabuquito hydro facility decided to propose a new methodology called
New Methodology 0076, which was eventually accepted in a slightly different
form as Approved Methodology (AM) 0026. The logic behind proposing this
methodology was that it would allow more reductions to be earned from
renewable energy CDM projects in the country. Chile’s special method of
valuing water in dams means that non-run-of-river hydro facilities with a reser-
voir only release water for generation when the least-cost bid process shows
that the ‘value of water’ or ‘shadow’ price given to the water is lower than
other forms of generation. The ‘value of water’ can be thought of as the oppor-
tunity cost of using the water at that moment instead of saving it to be used at
a later time. This price is based on the price that electricity commands at any
given time. This use of dams is different from countries that use them simply as
a baseload where the cost of operation and/or capital cost are the only factors
considered for the least-cost bid [17].
After severe droughts in 1998, the value of water in dams increased in
Chile. Chacabuquito developers, which included the World Bank’s Prototype
Carbon Fund and Hidroelectrica Guardia Vieja representatives, realized that
under the preferred baseline calculation for the operating margin, which takes
into account the last 10 per cent dispatched on the grid to calculate CERs
under Approved Consolidated Methodology (ACM) 0002, few reductions
would be calculated. The last 10 per cent dispatched on the Chilean grid was
almost always hydro since this resource was considered most expensive and
all cheaper options are selected by the merit order dispatch grid which
employs an independent entity for optimal system performance based on the
lowest marginal cost of generation. So, developers decided that a new
methodology for countries like Chile with merit order dispatch systems
should be created.
New Methodology 0076 proposed that only the first thermal generation in
the dispatch order for calculating the operating margin emission factor should
be considered for calculation of CERs from displaced generation. The rationale
for this proposal was that the CDM project would only displace thermal gener-
ation because the generation would always be of less value than the ‘value of
water’. Also, the limited storage capacity of some CDM projects ensures that
they must be immediately dispatched and do not have the ability to load
follow, which places them below the ‘value of water’ in terms of cost of genera-
tion and the dispatch order. Therefore, they concluded, the CDM project
would always be replacing a thermal resource and never water [18].
The UNFCCC accepted the methodology, but changed it in a significant
way that left the methodology authors with significantly fewer CERs than they
had predicted for the Chacabuquito project [19]. The proposed methodology
took into account the fact that the CDM project would almost always replace
thermal generation and specified that ‘hydro resources should be excluded
from the definition of marginal plants if thermal power units are dispatched
below those hydro resources on economic merit. If no thermal power plants
are needed to meet the demand without the CDM projects, then the hydro
resources are at the margin and therefore the emission factor is zero.’
However, the actual methodology omitted the first sentence above and only
included ‘If no thermal power plants are needed to meet the demand without
the CDM projects, then the emission factor is zero.’ In this way, Chilean devel-
opers used many resources on the creation of a new methodology only to have
it changed by the CDM Executive Board to be very similar to the AM0002,
which does not take into account the nuances of merit order dispatch grids
[18]. (More details about this methodology can be found in the country-
specific section on Chile.)
Even though Chacabuquito project developers were disappointed that their
methodology was not selected as written, the methodology may be necessary
for today’s electricity market in Chile. Chile’s fuel supply crisis since 2002
when the natural gas supply from Argentina began to be cut has dramatically
changed the shadow price of water in comparison to fossil fuels. So, in the
spring of 2007 when fossil fuels commanded a price of $250/MWh, the price
of fossil fuels was most likely considered more expensive than the ‘value of
water’, and dispatched last [17]. Therefore, the CDM project would, according
to AM0026, be displacing fossil fuel generation and yielding maximum CERs
even without the provisions of New Methodology 0076 [18].
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Changing existing methodologies

An alteration in UNFCCC methodology for the destruction of methane has
changed the economics of methane capture projects significantly. Prior to
November 2006, the UNFCCC methodology allowed developers to assume
that 100 per cent of the methane was destroyed by these open flares. However,
the UNFCCC’s new, revised destruction of methane methodology sets a
maximum amount of methane destroyed from these open flares of 50 per cent.
In order to prove that more than 50 per cent of the methane is destroyed, farm
owners have to have a closed flare with a temperature gauge. The heat of the
gas flared determines how efficiently the flare is working and the quantity of
gas destroyed [20].
The temperature gauge only costs about $1200, but the cost of the flares
varies widely. Open flares cost only $27,000–$150,000 while closed flares
range between $105,000 and $195,000. The price range reflects the capacity of
the flare, and in general, a closed flare costs 1.5 to 2 times more than its open
counterpart [21]. A Mexican company called Geosistemas has created a less
expensive closed flare that is comparable in price to the open flare. However,
this flare is not yet available for purchase [22].
Projects that started under the assumption that they could buy and use
open flares, but did not register the project before the change in methodology,
have had to revise their budgets to incorporate the cost of the closed flares and
in some cases have had to return open flares already purchased. Fear that the
methodology could change again prompts projects in the CDM cycle to finish
in a rush and discourages new project development from one company who
had to change 29 digester plans in Mexico after the methodology was
revised.3
This methane destruction from animal wastes methodology (ACM 0010) is
just one example of a methodology that has changed three times. As of March
2008, the methodology for grid-connected renewable energy (ACM 0002) had
seven revisions.
Project developers have had difficulty timing the start of their projects with
CDM registration because of all of the complicated steps and unforeseen delays
that can occur in the process. If a project begins producing energy before it is
registered, it cannot qualify for CDM [23]. Prior to March of 2007, projects
that had begun operations could retroactively register and backdate credits.
This provision was put in place to allow the projects that had begun operations
between 2001 and 2005 (after the Marrakesh Accords of 2001 established
CDM and before the Kyoto Protocol was ratified in 2005) to achieve registra-
tion [9].
Having uncertainty about the methodology one is using and the timing of
when the project will be registered adds a layer of complexity to the CDM
process that has discouraged project developers.
Regulatory and financial additionality

State-run electric power companies
Another problematic aspect of the CDM rules is the question of regulatory
and financial additionality. Regulatory additionality exists only if a project
has not been mandated by the government where it is located. Problems with
regulatory additionality arise in markets that are still highly regulated, as in
Costa Rica and Mexico. In these countries, if an energy application is not in
the national expansion plan, by law it usually cannot be considered for devel-
opment [24]. If a project is named in the plan, then it is considered to be
development that would occur in a business-as-usual situation and is not
additional [25]. This barrier prevented the Costa Rican state-run utility,
Instituto Costaricense de Electricidad (ICE), from successfully registering
Peñas Blancas hydro project [25]. Financial additionality requires that the
project depend on CDM revenues for its existence. This requirement is
another huge barrier for state-run electrical utilities.
ICE of Costa Rica is obligated to pursue the generation that is least cost for
the sake of providing the cheapest rates for their customers. If renewable
energy is found to be the cheapest option, it will be pursued in a business-as-
usual situation, making it nearly impossible to demonstrate financial
additionality for the CDM. CDM revenues are not allowed to be factored into
ICE’s financial analysis to make renewable energy cost-competitive with other
sources of generation because these revenues are considered uncertain.
Therefore, it is almost impossible for ICE to initiate CDM projects. However,
ICE was able to structure one successful CDM wind project by negotiating a
unique arrangement that involved a private company called Norteco owning
75 per cent of a wind farm called La Tejona. ICE had the option of buying the
installation over five years. This arrangement and the upfront money for CERs
from the Dutch Certified Emissions Reductions Procurement Tender
(CERUPT) fund allowed ICE to avoid having to ask permission to make an
investment, which may have been denied, and ultimately led to the develop-
ment of La Tejona wind farm. This project was able to prove financial
additionality because an experienced carbon consultant called Climate Focus
developed the PDD and showed that the CERs were essential to the project’s
financial success and factored into the project’s pro forma from the onset of
project planning. However, this rare purchase agreement has not been repli-
cated because of the complexity of structuring the ownership [25].
ICE was also able to sidestep the problematic demonstration of regulatory
additionality, for example, the Tejona wind farm. This farm, at just 20MW, was
small enough to be left out of ICE’s future expansion plan because it did not
have a major impact on the grid’s functioning. Therefore, it was not considered
business-as-usual as it would be if it were mentioned in this plan [25].
Mexico’s Comisión Federal de Electricidad (CFE) also faces huge barriers
to implementing CDM projects. Not only does CFE face the same regulatory
and additionality problems that ICE does, but CFE’s structure is such that it
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does not have protocols as to how to handle CER revenues. By law, CFE could
not keep these extra revenues. They would most likely go into a separate fund
held by the Mexican government instead of directly to CFE. Therefore, CFE
has little incentive to be involved in the process. If CFE tried to lobby for the
incorporation of CERs in the least-cost planning process for projects, then the
Mexican government would be at risk of allowing a project that depends on
these revenues. If the project failed to be registered or CERs were worthless in
the post-2012 rules, the Mexican government would be forced to pay the CER
value in order to prevent the project from going into debt.
If CFE wants to enjoy the value of the CERs, then it must be very creative
in how it structures its energy purchases. For the 102MW wind farm called La
Ventosa in Oaxaca, CFE elicited a bid for construction that was accepted by
Iberdrola of Spain. Iberdrola then built the wind farm and will operate it for 25
years. Iberdrola is selling the electricity to CFE in a Power Purchase Agreement
(PPA) and will transfer the installation to CFE after 25 years. The energy price
negotiated in the PPA probably incorporates the cost of construction and the
value of the CERs. Iberdrola is then able to earn the CERs as any other
independent power producer (IPP) would, with a financial additionality and/or
barriers analysis [26]. CFE was also able to earn CERs for the country’s first
commercial wind farm, known as La Venta II. It is unclear from the PDD for
this project how the financial and regulatory additionality argument complica-
tions were overcome as the Mexican least-cost planning process and expansion
plan were not mentioned [27]. When directly questioned about this issue, CFE
representatives were unresponsive.
In summary, regulatory and financial additionality is complicated when a
country has a state-run energy sector that has strict rules about the inclusion of
energy projects in planning documents or laws that mandate the creation of the
CDM project. Experienced, adept PDD authors, however, can sometimes
navigate these pitfalls and prove additionality even as the Executive Board
tightens its controls on registration.
A perverse incentive?
The regulatory and financial additionality barriers can also complicate the
process of promoting domestic action to slow climate change. Up until 2005,
countries were hesitant to take policy steps towards mitigating greenhouse gas
emissions. Their concern was that the policies that reduced emissions or
mandated renewable energy development would prevent new CDM projects
from proving regulatory additionality. Also, if incentives were in place, like a
feed-in tariff, and renewable energy became competitive with fossil fuel-based
alternatives, then financial additionality would be impossible to prove.
Furthermore, if a policy was put in place after a CDM project began operating,
it could change the baseline of that project in subsequent crediting periods,
causing it to earn fewer CERs than the investors initially predicted at the start
of the project [2].
This concern was justified as some countries prevented projects that

complied with a mandate from earning Executive Board approval. Costa Rica
has a renewable energy mandate of 20 per cent. Projects that fulfilled this
mandate were not allowed by the CDM Methodological Panel to earn CERs in
2004 [28]. Also, a 1995 requirement that privately generated electricity in
Costa Rica be derived from renewable sources that had the goal of de-
carbonizing the country’s energy portfolio and reducing reliance on imported
fossil fuels has recently caused the CDM Methodology Panel to question the
additionality of private hydroelectric plants. Also, countries worried that
energy efficiency standards would negate the additionality of projects that
improved performance efficiency. As a result, Colombia chose not to officially
incorporate energy efficiency standards into its energy laws in 2003 and 2004
following a country-wide assessment of CDM potential. Therefore, ironically,
the Kyoto Protocol had created a perverse incentive for developing countries to
do nothing domestically to reduce greenhouse gas emissions.
Although the Executive Board (EB) was silent mandate on whether or not
mandates and incentives for greenhouse gas-mitigating activities would
compromise the additionality of projects, it was aware of the issue. The EB
initially struggled internally with the treatment of various types of legally
binding mandates (L- and L+) and voluntary incentives (E- and E+) [29].
Then, in November of 2005 at its 22nd meeting, the EB abolished the idea
of treating mandatory and voluntary programmes differently and differenti-
ated these programmes by those that promoted more and fewer
emissions-intensive fuels and practices. To ensure that countries did not imple-
ment programmes that intentionally raised emissions in order to capture the
revenue from CERs, the EB stated that policies implemented after the
December 1997 ratification of the Kyoto Protocol would not be considered
when calculating project emission reductions. Reductions would be calculated
based on ‘a hypothetical situation without the national and/or sector policies
or regulations’. For policies that reduce emissions, ‘the baseline scenario need
not take these policies into account if the policy was implemented since the
adoption of the CDM Modalities and Procedures in November, 2001’. [29]
Now, PDD authors were able to use the hypothetical situation that would
reflect a business-as-usual case without laws passed after 2001 that reduce
emissions in order to estimate predicted reductions. In this way, project owners
can be ensured that their projects will still earn an acceptable number of CERs
in a country with strong renewable energy legislation [30].
This ruling implicitly penalizes countries that took early-action steps prior
to 2001 to address climate change. However, to create a hypothetical scenario
of emissions for a baseline calculation that took into account policies that were
implemented over nine years ago would greatly complicate an already confus-
ing calculation and most likely not result in an accurate baseline [31].
While this 2005 ruling addresses CDM developers’ concerns about
emission reductions that can be earned in a country with strong incentives for
greenhouse gas-mitigating activities like renewable energy incentives, it does
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not speak to complications of regulatory and financial additionality. Since this

statement was put in an Annex entitled ‘Further Guidance for the Treatment of
National or Sectoral Policies in the Baseline’, the author of this book and CDM
experts from Baker & McKenzie’s Brazilian Environmental and Climate
Change Practice Group interpret this ruling to apply only to baseline calcula-
tions [29 and 31]. Problems with the perverse incentive still arise because a
renewable energy mandate could compromise regulatory additionality as the
project could be shown to have occurred in a business-as-usual situation. And
a production tax credit that provides a fixed premium per kWh rate for renew-
able energy must be taken into account in the financial additionality argument
for projects. These complications have led carbon brokers like Ecosecurities to
pursue projects in countries without incentives or mandates for renewable
energy [32].
Country-specific complications
Since the EB proclamation about baselines in 2005, countries have begun to
implement policies that promote greenhouse gas reduction. In July of 2007,
Costa Rica boldly set a goal of becoming carbon neutral in its transport and
electricity sectors by the year 2021 with its Law of Peace with Nature (Ley de
Paz con Naturaleza) [33]. This bold resolution is an important step towards
mitigating climate change that few other developing nations have followed
[34]. Panama also has new renewable energy laws that provide aggressive
incentives that cover up to 25 per cent of the initial project costs for renewable
energy generation [35]. Currently, however, Panamanian law prevents CDM
projects from earning both this domestic financial incentive and CERs. Other
countries, such as Brazil, Uruguay and Chile, have renewable energy mandates,
while Argentina has a production tax credit and Ecuador a feed-in tariff. A
host of incentives for renewable energy have swept through almost all of the
countries in the region (which will be described in detail in the country-specific
chapters), but it is not yet clear if these renewable energy mandates and incen-
tives will conflict with the demonstration of additionality.
Questions of regulatory additionality also exist for methane capture
projects. In Mexico, Regulation 083 provides comprehensive guidance for the
collection, utilization and flaring of landfill gas. Also, new hog farms are, by
Mexican law, required to build biodigesters [36]. Given the existence of these
rules, any landfill gas capture project or new hog farm biodigester in the country
would not be additional. However, this regulation for landfills is systematically
not followed because it is a part of a Federal Law and municipalities handle
local municipal waste. Also, it is routinely not enforced [37]. The new hog farm
biodigester ruling has yet to be tested. The CDM rules state that if a regulation
that would mandate the existence of a CDM project is systematically not
enforced, then additionality can still be proven [38]. The burden of proving that
the law is not followed, however, falls on the PDD author.
Programme of activities
Another question of additionality is raised by a new CDM methodology, as of
July 2007, that is meant to provide a clear incentive for greenhouse gas reduc-
tion policies for certain projects. The Programme of Activities (PoA) promotes
activities in specific industrial sectors, allowing multiple projects implemented
at different times, that comply with a governmental regulation or private sector
initiative, to be registered together. This PoA, therefore, provides an incentive
for developing countries to devise policies that promote greenhouse gas reduc-
tions [2]. The policy itself cannot qualify for CDM, but programmes
implemented under or as a result of the policy can.
However, the rules of the programmatic CDM are not clear with regard to
whether or not the CDM project would be able to demonstrate regulatory
additionality [31]. If the project helped fulfil a national mandate or other
regulatory requirement, would its additionality not be in question as the
project would have had to exist to meet the standard anyway?
Another barrier to the implementation of programmatic CDM projects is
the fact that the Designated Operational Entity (DOE) is liable for any CERs
that are issued in error. If the DOE approves a project that the CDM Executive
Board later rejects, according to PoA rules, that DOE must pay for any CERs
that were issued between the time of issuance and rejection. The DOE will
often create a clause in their contract with the project developer that makes the
developer responsible for this liability. Since DOEs are in high demand and
have plenty of work, PoA projects are low on their priority list [39].
There has been not one programmatic project registered in the ten months
since the methodology was passed because of uncertainties in how the process
would work. Only one grouping of programmatic solar home systems in
Bangladesh and one methane capture project from swine farms in Brazil were
in the validation process as of April 2008 [40]. Countries may also be hesitant
to implement laws that promote development because they are still concerned
that they could negate the additionality of CDM projects or cause complica-
tions in the national approval process. In March of 2008, Estonia’s DNA
declared that it would not approve renewable energy projects for Joint
Implementation Emission Reduction Units because they do not need carbon
finance with all of the domestic support they currently receive [41].
Increasing stringency on additionality arguments

The challenges to proving both regulatory and financial additionality have
been heightened in recent months. Since 2005, the Executive Board’s average
rejection rate for registering projects was 7 per cent; during the time period
September to November of 2007, the rejection rate was 30 per cent. Young,
eager consultants who have begun to carefully scrutinize PDDs and validation
reports have been recently hired by the Board. They report that 40 per cent of
PDDs make a poor additionality argument and 20 per cent use an incorrect
methodology. This experience highlights the importance of having an experi-
enced person or firm complete the PDD and hiring a thorough DOE with a
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good reputation to complete validation [42]. Some DOEs have begun to get a
reputation for allowing non-additional projects to pass validation [43].
Availability of DOEs and carbon brokers

As explained in Chapter 5, ‘Informational Barriers’, and each country-specific
chapter, the existence of local carbon brokers can have a large bearing on
whether or not a project becomes successful. Without these folks to help insti-
gate and support projects, informational and logistical barriers can prevent their
implementation. If a carbon broker does not have an office in the country, it can
be prohibitively expensive for the project developer to hire a foreign carbon
broker and pay to fly him or her to the site of the project multiple times.
The availability of DOEs, who validate a project by ensuring the PDD
matches the actual project’s operations and verify the reported emission reduc-
tions each year, is also key to project implementation. During 2007, the wait
times for hiring a DOE averaged six months per project. The shortage of certi-
fied DOEs added to the lengthy process of registration; validation by the DOE
and registration, even without the wait time, can take up to six months [5].
Another problem with DOEs and carbon brokers is that hiring them can
be very costly. Hiring local DOEs like Instituto Colombiano de Normas
Técnicas y Certificación (ICONTEC) of Colombia tends to be more economi-
cal since the cost of wages is cheaper and the DOE’s travel expenses are
minimal. However, because the DOEs have to receive a $15,000 certification
from the CDM Executive Board before they can validate or verify a project,
most of these entities are based in Europe [44]. A ‘chicken and egg’ problem is
created as countries with few CDM opportunities may not entice many local
firms to get UNFCCC accredited; on the other hand, too few DOEs in a given
country may discourage the development of CDM projects since there will be
no cheap, local DOEs available to verify projects. The most well-known of the
DOEs are companies like Det Norske Veritas (DNV) which have a
background of auditing companies to ensure that they comply with standards,
and began validating and verifying projects as an extension of their core
business. Developers of Zambizá landfill gas capture in Ecuador found that to
do routine maintenance, like changing the battery on the gas meter, they had
to have the DOE who was based in Brazil fly to the site in Quito in order to
verify that the operators of Zambizá did not tamper with the meter to yield
more emission reductions [45].
Countries or projects that do not attract the attention of carbon brokers
are at an additional disadvantage when it comes to hiring a DOE. Large carbon
brokerages have relationships with DOEs that allow them to get preferential
prices. Some carbon consultants advertise in their proposals to project owners
that they can secure up to a 40 per cent discount with well-known CDM
auditors if the project owner contracts their services. Without utilizing a
carbon broker, project owners would be forced to pay the full price for an
auditor’s services.4
Conclusion
Significant CDM-specific procedural and methodological barriers have
discouraged the development of some projects. However, each complex proce-
dure in the CDM project cycle has a purpose that attempts to filter out the
non-additional projects. As the process of CDM rule refinement continues and
new versions of methodologies are released, the process gets more complicated.
Sometimes these changes further discourage development, but they can also
stimulate it as is the case with the PoA methodology. The flexible nature of the
CDM process allows project developers and consultants to propose changes to
the operating and build margin ratios and existing methodologies, but
sometimes these changes can have unexpected consequences that do not gener-
ate more CERs. Future adjustments to CDM renewable energy methodologies
to account for countries with low emission factors and high levels of imported
energy could help level the playing field for all countries.
As the CDM develops, issues of regulatory additionality will continue to be
clarified and hopefully will be modified to clearly allow state-run utilities to
register CDM projects even if they are planned capacity additions. Also, the EB
will hopefully make a ruling to clarify issues of financial and regulatory
additionality for host countries that have legislation that mitigates greenhouse
gases so as to prevent these countries from having a perverse incentive to do
nothing about climate change. The necessity for more, local carbon consultants
and DOEs is obvious as the cost of hiring foreign firms is often prohibitively
expensive for developers. These consultants and DOEs need to be more careful
in their evaluation of projects to pass the Executive Board’s new stringent
requirements.
Notes
1 The author assumes that the logic in this 75 per cent (operating) / 25 per cent (build)
split is that the build margin consists mainly of plants being brought online to fulfil
off-peak demand, which would not be appropriately replaced by wind and solar
plants.
2 El Niño Southern Oscillation (ENSO) and La Niña are caused by ocean surface
water fluctuations in the Pacific Ocean, occurring at irregular intervals between two
and seven years, that cause weather changes [46].
3 This information is not cited to protect the author and parties involved.
4 This special relationship between the carbon consultant and DOE also draws into
question the possibility of allowing non-additional projects to be recommended for
registration since it is in the interest of both of these entities to register as many
projects as possible and continue their practice of referrals. (The source of this
material has been kept confidential to protect the author and parties involved.)
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39 Point Carbon (2008) ‘Programmatic CDM stalls on “liability” concerns’, CDM/JI
Monitor, 14 May
Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, April
41 Point Carbon (2008) ‘Renewable energy support halts Estonia’s JI approval
process’, 3 March
42 Newcombe, K. (2007) Interview with K. Newcombe, Goldman Sachs Carbon
Division, in CORFO Chile Invest, 14 November, Santiago, Chile
43 Michaelowa, A. (2007) ‘Fundamentals of programmatic CDM’, presentation at
CDM Tech Workshop, Cartagena, Colombia, 21 March
44 UNFCCC CDM (2007) Application for Accreditation, 24 February
Quito, Ecuador
46 Intergovernmental Panel on Climate Change (2001) ‘Interannual variability:
ENSO’, ch 9 of Climate Change 2001: Working Group I: The Scientific Basis,
IPCC, Paris
8
Small-Scale Barriers
Introduction
Small-scale renewable energy projects under 15MW can be broken down into
two categories: (1) those funded by for-profit entities for the purpose of feeding
electricity into the grid or to sustain a factory’s operations; and (2) those
sponsored by donations or grants that provide off-grid energy for rural
communities. The latter of these projects rarely earn Clean Development
Mechanism (CDM) credit because of their size, even though they almost
always promote sustainable development. In fact, in Latin America there are
no off-grid CDM projects. Also, if a non-profit entity provides a grant for a
project, that grant usually precludes the project from being proven financially
additional. It is for these reasons that it is particularly important to investigate
the barriers to small-scale projects.
Carbon brokers are usually not interested in developing projects under
15MW for CDM credit because their size is too small to generate enough
Certified Emission Reductions (CERs) to cover consultant costs. Therefore, only
6.4 per cent of the CERs of registered projects by March 2008 are derived from
small-scale projects [1]. Small-project developers are further discouraged by the
fact that 80 per cent of all projects do not make it to the registration stage of the
project cycle because of all the barriers that face projects [2]. However, there are
some instances where these projects, especially microhydro ones, are profitable
and undertaken by developers, financers and carbon brokers. Most of the small-
scale projects in Spanish-speaking Latin America thus far have been undertaken
by for-profit entities, and consist of microhydro projects and methane capture
from hog farms for flare or use in a microturbine [3].
The current status of small-scale projects in Latin America

The microhydro projects were profitable before CDM revenues were available,
and undertaken by foreign firms like Italy’s Enel. Now CDM revenues add
additional profit to these projects. Many of the CDM hydro projects under
15MW are in the Central American countries because that size of capacity
addition is appropriate for the needs of these smaller grids.
128 BARRIERS
By May of 2007, 54 small-scale projects in the region existed and 94 per

cent of these projects were methane capture or microhydro [3]. Methane
capture and use for electrical generation or flare were some of the first projects
developed because they generate a large number of reductions for relatively
small capital costs when compared with other renewable energy projects. The
high warming potential of methane yields many reductions even if it is not sent
through a turbogenerator to displace fossil fuel-intensive electricity from the
grid. Therefore, the basic requirements for the creation of one of these projects
are just a plastic tarp to cover the manure, a suction system to pull the methane
to a flare, a gas meter and a flare. For connection to the grid, transmission lines
and a turbogenerator are required. While this system may seem simple, poor
performance of these projects proves that for maximum CER production, a
more refined system with more components is necessary. (More details about
these types of systems can be found in Chapter 2, ‘Technical Barriers’.)
The carbon consultant involved in the CDM project cycle for 29 of these
methane capture projects also claims that this type of project enjoyed early
success with small-scale registration because all 29 of the methane projects are
actually for one owner, who unbundled an umbrella of projects owned by the
same farm operations in order to be able to use the streamlined methodology
for small-scale projects. Unbundling projects in this way is not allowed by the
CDM Executive Board. Given this situation, the total number of projects
should not be impressive since most of these methane capture projects are
really just one larger project.1
Twenty-one more projects involve the creation or upgrading of small hydro
facilities. Critics suggest that most microhydro CDM projects were planned
before developers knew of CDM revenues and would have existed without
CDM revenues since the revenues only add 1–2 per cent to the overall project
revenues [4 and 5]. A representative of the Guatemalan Centre for Cleaner
Production (Centro Guatemalteco de Producción Más Limpia) explains that
there are several hydro projects because of subsidies that reduce the import tax
for hydroelectric equipment in Guatemala. Also, once project developers are
familiar with the methodology for hydro development in the region, it is easy
for the same or other developers to replicate it [6].
The possible improper use of small-scale methodologies for the methane
projects and non-additional nature of the microhydro projects suggests that the
barriers to quality additional small-scale project development in this region are
too cumbersome to overcome [7]. A streamlined small-scale methodology
sought to address this flaw by putting small projects on a level playing field
with large ones. Recently, a Programme of Activities (PoA) methodology has
furthered this effort. More details about both of these methodologies are
described in detail later in this chapter. Next in this chapter, the financial viabil-
ity of small-scale projects based on current carbon prices is assessed. Finally,
country and region-specific measures to promote or discourage small-scale
projects are discussed.
SMALL-SCALE BARRIERS 129
Existing small-scale methodology

Currently there is one streamlined methodology for small-scale CDM projects
under 15MW. This methodology is still quite involved and complicated and,
like large-scale CDM projects, small-scale projects must still usually hire
carbon brokers to facilitate the project cycle. The current small-scale method-
ology for renewable energy projects differs from the comprehensive
methodology in a few important ways.
There is a simplified baseline emission calculation that allows project devel-
opers to compare the emissions resulting from the project to the emissions that
would occur in a typical business-as-usual scenario (baseline emissions), using a
grid emission factor that is an average of tonnes of CO2/MWh from old and
new facilities and those under construction. These two factors are known as the
operating and build margins.2 Developers of larger CDM projects typically have
to determine the exact emissions that are being replaced by calculating the
carbon intensity of the emissions from power plants that produce the last 10 per
cent of generation in the transmission grid of the project for every hour of the
year. Although this baseline simplification is a step in the right direction, it is still
difficult for project developers in rural areas to find an average emission rate
[8]. This emission rate can be difficult to pin down because villagers use a mix of
fuel wood, car batteries, diesel generators and kerosene from a variety of
sources, which each have different energy intensities. Also, the amounts of
firewood fuel used are described in terms of local measurements that differ from
person to person as they relate to the amount one can carry [9].
Secondly, the small-scale CDM methodology allows project developers to
fulfil only one of the five additionality requirements. The current requirements
mandate that large-scale CDM projects break technological, financial and first-
of-a-kind barriers to establish that they would not occur in a business-as-usual
case [10]. Allowing the fulfilment of only one additionality criterion greatly
simplifies this step. However, the one additionality criterion that the small-
scale project fulfils must be a prohibitive barrier that is significant enough to
prevent the project from being developed without CDM revenues [11].
The third important way in which small-scale projects differ from large-
scale ones is that small projects can be bundled together for the purpose of
validation [12]. This rule allows small projects to share a Project Design
Document (PDD) and cut transaction costs since the PDD would only have to
be written and approved once. This bundling mechanism works best for
projects of the same type since writing one PDD for a wind and solar project
with different baseline calculations and additionality requirements would be
almost the same amount of work as writing two PDDs [13].
Lastly, there are two other small benefits available for small-scale project
cycle participants. As of 2007, small-scale projects are now able to waive regis-
tration costs, which are about $6000 for small-scale projects [14]. These
projects also have simplified PDDs and the same Designated Operational
Entity (DOE) can validate and verify a project [10].
130 BARRIERS
Although the special small-scale methodology is meant to make it easier for

small projects to pass through the project cycle, it does not always achieve its
goal. The advantage of having small-scale projects bundled together to benefit
from only having to write only one PDD proves difficult to take advantage of
in reality. The Public Utility of Medellín (Empresas Públicas de Medellín
(EPM)) had difficulty bundling microhydro projects since there are not always
land and water rights available for purchase, or transmission networks that
can serve prime microhydro sites [15].
Since no solar projects in the region exist, the simplified methodology is
clearly not streamlined enough to stimulate development in this sector. As a
result, IT Power partially funded a study that considered a methodology,
specifically for solar home systems, that would allow for the use of a simplified
baseline calculation of an average global emission factor of kerosene, which is
usually used for lighting before these systems are installed [16]. This methodol-
ogy ended up never being utilized.
Programme of activities
This streamlined methodology has also failed for very small-scale, renewable
energy projects under 1MW in rural populations. Often, these renewable
energy projects will involve the use of solar panels for light and electricity. In
the absence of the photovoltaic cells, some CO2emissions are released from the
fuel wood, diesel generator sets, car batteries, or kerosene that villagers once
used, but these emissions are usually quite small since the electrical demand of
rural villages is usually low compared with the demand of city residents.
Therefore, few CERs can be earned from these types of projects and the typical
rural population cannot pay for the upfront costs and operation and mainten-
ance of the system with CDM revenues. If CDM revenues were combined with
grants from international organizations or domestic programmes to assist with
the electrification of rural populations, then they could be economically feasi-
ble. However, as previously mentioned, current CDM rules to establish
additionality discourage the use of grants and subsidies for these types of
projects. Subsidies make the projects more financially feasible, but, at the same
time, they make it difficult to establish that the project would not have
occurred in a business-as-usual case [9].
Because of this conflict between aid organizations’ donations and the
acquisition of CDM revenues, a type of programmatic CDM or PoA was
created in July 2007 [17 and 18]. In the programmatic CDM rule-making,
parties decided that
a programme of activities (PoA) is a voluntary coordinated

action by a private or public entity which coordinates and imple-
ments any policy/measure or stated goal (i.e. incentive schemes
and voluntary programmes), which leads to anthropogenic GHG
emission reductions or net anthropogenic greenhouse gas
removals by sinks that are additional to any that would occur in

the absence of the PoA. [19]
In other words, a programme that a country puts in place to promote a certain

behaviour that lowers greenhouse gas emissions, such as installing compact
fluorescent lights or buying a hybrid vehicle, can qualify as a CDM project.
This methodology differs from the current small-scale bundling mechanism
(where projects are grouped together until they make up the maximum number
of emissions for a small-scale project definition) in that projects can be grouped
to exceed the size limit of a small-scale project. Also, projects do not have to be
registered at the same time, allowing projects that begin generation years after
the PDD was written to qualify. Finally, PoAs can cross country borders. They
do, however, have to go through the registration process and must have real and
measurable emission reductions that may be calculated and verified through a
sampling and extrapolation technique [20]. A country that has a policy that
promotes emission reduction projects does not automatically qualify for a PoA,
however, individual projects or activities that comply with a policy that
promotes greenhouse gas mitigation activities can supposedly be registered as a
PoA. [21]. For a more detailed discussion of the nuances of the PoA and project
eligibility, see Chapter 7.
Part of the impetus for the PoA was to allow under-represented popula-
tions to benefit from CDM revenues, making the distribution of funds more
equitable [21]. It has the potential to do just this and eliminate the huge barrier
of small-scale transaction costs by allowing individual households and small
industries to participate [22]. With regard to renewable energy, the potential
for PoA CDM projects is huge in rural electrification programmes that may
include provisions for photovoltaics, biomass, and small hydro and wind
systems. Most people, however, envision PoA to apply to energy efficiency and
transport projects before renewable energy projects. An energy efficiency
programme that encouraged homeowners to buy more efficient refrigerators,
stoves or cars could theoretically create activities that would be eligible for
registration under the PoA CDM, provided the project is still deemed
additional [23].
Despite the enormous potential for programmatic CDM, it has not yet
been implemented anywhere worldwide. As of March 2008, Brazil and
Bangladesh are undergoing validations with this methodology [24]. Mexico
hopes to register a programmatic forestry project in the near future as well
[25]. The untested rules for validation and verification are so different from
other methodologies that countries’ governments may be hesitant to expend
time and energy on the process of formulating a policy that would allow for
project registration under it. Also, most governments tend to have little educa-
tion about CDM and few direct incentives to promote it. Policies for
programmatic CDM could emanate from a variety of governmental depart-
ments, some of which may or may not be aware of this possibility. During the
author’s interview process with the DNAs and Ministries of Energy of 12 Latin
132 BARRIERS
American countries, no governmental officials had a clear idea of how the PoA
would impact their country or knew how to create policies that would be
consistent with it. Furthermore, the PoA could be stalled because the process of
policy making often takes years as aspects of the legislation are contentious.
(For more information about the PoA, see Chapter 7, ‘UNFCCC Procedural
and Methodological Barriers’.)
Transaction costs
Despite the efforts to reduce transaction costs for small-scale projects through
the streamlined methodology and PoA, critics from the Pembina Institute of
Canada, IT Power India and the Centre for Clean Air Policy claim that ‘the
UNFCCC simplified procedures for small-scale CDM projects do not suffi-
ciently reduce transaction costs to make these projects attractive for investors’.
Also, the overwhelming response that project owners and carbon brokers give
as to why more small-scale projects have not been developed is ‘transaction
costs’. The transaction costs to certify a small-scale project can be almost as
high as certifying a large-scale one [8].
CDM project cycle costs can be up to $500,000 for the complete document
creation, registration, validation and annual verification [26]. IT Power and IT
India in 2001 predicted that the average small-scale project costs would be
~$58,400 [27] and the World Bank estimated that the current streamlined
methodology can reduce project transaction costs by $155,000 per project
[28]. When measured on a per tonne of CO2 equivalent basis, the CDM trans-
action costs range from €0.1 for a very large industrial gas projects to €10 for a
small hydro project and €1000 for a photovoltaic project [29].
An example of project viability

To consider if a project is viable or not for CDM revenues, one must just
compare these per tonne of CO2 mitigation costs with the price that can be
attained per CER, which was between €10 and €25 in February of 2008 [30].
Other estimates show the minimum project size for project viability. The
Pembina Institute of Canada estimates that the CDM is not worthwhile at
carbon prices below $8/tonne of CO2 and projects must be at least 1.5MW to
be economical [8]. A report by the Organisation for Economic Co-operation
and Development (OECD) estimated in a 2001 report that the minimum
renewable energy project size for the transaction costs to be covered by the
CERs generated is 1MW at a price of $5/tonne of CO2 or 10 per cent of the
overall project costs [31].
These estimates of minimum project size are at the low end of current
carbon brokers’ requirements; brokers like Ecoinvest will not consider projects
that generate less than 30,000 CERs per year or have a minimum capacity of
about 16MW, just above the size requirement for small-scale projects [32]. A
wind energy project with a capacity factor of 30 per cent in Ecuador, where
there are relatively high regional emission factors because of a heavy reliance
on fossil fuels, can provide the requisite number of CERs for Ecoinvest to
participate as a project developer or carbon broker. However, the same size
wind project with the same capacity factor would not produce sufficient CERs
in Costa Rica because of the low regional emission factors due to the large
number of hydro applications in the country.
In Costa Rica, a wind project with a 30 per cent capacity factor would
have to have a rated capacity of 63MW to stimulate the interest of Ecoinvest.
The extra revenue generated per kWh from each of these applications would
also vary from $0.18/kWh in Costa Rica to $0.713/kWh in Ecuador if a CER
price of $10/tonne of CO2 is assumed.3 These CERs represent about 3 per cent
additional revenue in Costa Rica (if renewable generators receive an estimated
$0.06/kWh) and 7.4 per cent additional revenue in Ecuador (assuming genera-
tors receive the feed-in tariff price of $0.0939/kWh for their wind generation)
[33]. See Appendix A for the calculations related to this analysis.
CDM revenues for projects like solar energy that cost more per kWh to
implement will contribute less to the overall project costs. For projects like
methane capture and use in a microturbine, which will have a higher capacity
factor of about 85 per cent, a smaller nameplate capacity that generates the
requisite number of CERs could be of interest to a carbon broker. For example,
a biomass project in Costa Rica with an assumed capacity factor of 85 per cent
could be economical at 22MW instead of the wind project, which would have
to be 63MW. The extra revenue generated per kWh for this type of project
would be $0.18/kWh or 19 per cent additional revenues.
Although most carbon brokers are not interested in purchasing CERs from
small-scale projects, there are some customers who are willing to pay a
premium for them since they usually promote community development. South
Pole Carbon of Switzerland and FC2E of Spain act as carbon brokers for small-
scale projects and sell these CERs to customers, such as the Swiss Climate Cent
Foundation and Kommunalkredit, who buy CERs on behalf of the Swiss and
Austrian governments. These carbon brokers also buy the emissions reductions
as Voluntary or Verified Emissions Reductions (VERs), which also each repre-
sent a tonne of CO2 sequestered or mitigated and often undergo a similar, but
less rigorous process than the CDM project cycle and are sold on the voluntary
offset market in the US and elsewhere [34].
VER market as an alternative to the CDM

VERs are typically not project developers’ first choice since they almost
always command a lower price of about 30 per cent less than CERs. This
decreased value is a result of the lack of standardization of these credits and a
reflection of purchasers’ inability to use them for compliance purposes. The
rigour that voluntary projects face with regard to ensuring that the emission
reductions are additional to a business-as-usual situation, and are annually
verified, varies. Generating VERs is an option for projects that are stuck in
the CDM registration process and have not yet begun generating CERs. After
a project achieves CDM registration and begins generating CERs, it cannot
134 BARRIERS
continue to create VERs as that would constitute double-counting. These

pre-compliance VERs allow project developers to capture some of the carbon
revenues they may have relied on for the project’s existance. Since a VER is
not for compliance purposes, no certification is necessary unless demanded
by the customer. A few certification bodies have recently been created for this
market to ensure that these reductions are measurable, real, additional and
verifiable.
The highest level of VER certification comes from the Gold Standard, which
only recognizes energy efficiency and renewable energy projects and requires
that a strict set of guidelines be followed for projects for high-quality VERs that
produce sustainable development and can earn high prices. However, this
process of certification through the Gold Standard involves the entire CDM
process (with the Gold Standard representatives instead of the United Nations
Framework Convention on Climate Change (UNFCCC) acting as the registra-
tion body) plus a few additional steps to ensure the project promotes sustainable
development [35]. When facing this level of complexity for certification, project
owners usually opt to undergo the CDM process where they can typically earn a
higher price for their CERs. Another well-known voluntary certification is
called the Voluntary Carbon Standard (VCS), which accepts all types of projects
and uses the methodologies, DOEs and procedures of the UNFCCC. VCS was
developed by the International Emissions Trading Association and has the
reputation of being a reliable certification, but not as strict as the Gold Standard
[36]. VER Plus is another voluntary protocol, which was created by Designated
Operational Entity TÜV SÜD, but is not as widely recognized or used [37]. The
Chicago Climate Exchange has created its own methodologies for VER offsets
for its voluntary but legally binding market in the US. The Climate Action
Registry, originally created for offsets utilized in the emerging Californian
compliance market, but available for use anywhere in the US, is yet another
voluntary standard that is gaining traction [38].
Only in rare instances can VERs earn more than CERs; one of these
examples occurred in sub-Saharan Africa where a VER from an off-grid solar
project commanded a price of €30 per tonne [39]. Another transaction resulted
in a VER sale of $78 per tonne of CO2 [40].
While the Gold Standard represents the highest level of certification
complexity, no certification procedures at all comprise the other end of the
spectrum. In Nicaragua, the author met with the president of a local solar
installation company that was receiving some VER revenues. The VER
provider, who will remain unnamed, approached this solar company after it
was an established business with many clients and offered to pay a dollar
value for each subsequent MW of solar panels they installed. The extra
revenue that the solar company now receives comes from a portion of the
VER sales that the offset provider completes. The VERs that the offset
providers’ customers purchase from this project are not additional since they
do not directly promote the installation of these projects. The solar company
was installing systems before the offset provider gave it VER revenues and
would still install systems in the absence of these revenues. It is true that a
vibrant local solar installation business is not a typical trademark of
Nicaragua. Therefore, the offset provider’s VER revenues are providing a
donation that helps promote an underdeveloped industry in this country.
However, if the offset provider’s customers believe they are making quantifi-
able and real carbon reductions with each VER purchase, as the product is
marketed, they are being deceived. Customers in this market may not yet be
savvy enough to realize that they need to select a VER that has been certified.
And, even if it has been certified, the standards for certification are so diverse
that the customer may still not know if he or she is helping make carbon
reductions that are additional.4
US businesses have begun buying VERs not only to promote a positive
public image of the company, but also because they hope that these credits will
be fungible in future markets or that they will receive early-mover recognition
and benefits in a future domestic carbon market. However, given the lack of
standardization in certification of VERs and the questionable nature of some of
them that are sold, it is unlikely that these businesses will be able to transfer
these purchases into this market [41].
Typically, VERs are sought by project owners when the project fails to
achieve CDM registration. These reductions are seen as a backup mechanism
and way to provide a bit of extra profit for the already financially viable
project. Also, some developers choose to pursue VERs if the transaction costs
of completing the CDM project cycle are too high. Fundación Solar is working
on a project to assess the potential that VERs have to contribute to the project
finances of isolated, off-grid solar systems in Guatemala [42].
VERs are also sought as pre-compliance CERs. Pre-compliance VERs
could be generated before the 31 March 2006 deadline that the UNFCCC set
for utilization of the credits that had been generated since 2001 after the
Marrakesh Accords. Now, they are only generated when a project has submit-
ted its paperwork to the UNFCCC Registration and Issuance Team and is
awaiting its decision. Technically, the project should not begin operations until
it is formally registered, but bottlenecks in the UNFCCC process have allowed
some projects to earn carbon revenues for VERs in the form of pre-compliance
CERs [43].
The size of industries as a barrier

The size of most of the industries in the Central American countries is not large
enough to support the CDM transaction costs. The renewable energy sector
suffers since capacity additions tend to be small and incremental. Also, other
industries, like the agro-industry sector, that can benefit from methane capture
and electrical generation, have not benefited as industries have in Mexico
because the area does not have large farms with a critical mass of animals to
make the operation profitable. AgCert, the world’s leader in methane capture
projects for CDM revenues, will not develop a biodigester for a farm with less
than 5000 hogs in full cycle (sows, gilts, boars, weaners and finishers) or 3500
136 BARRIERS
large finisher hogs. Most farms in Central America have fewer hogs than this
critical number [44]. Bundling farms to reach the requisite number of animals
tends to be complicated since the project developer has to work with multiple
project owners, farm veterinarians and staff. Coordinating many farms
increases project risk as more variables could influence project performance.
Also, in some of the countries like Costa Rica, farms are operated separately
and, like the hog farms, do not lend themselves to grouping [45].5
Despite critics’ complaints that the current methodologies do not provide
sufficient incentives for small-scale development because of high transaction
costs, making the certification process too simple could compromise the goals
of the Kyoto Protocol by allowing projects that would have occurred in a
business-as-usual scenario to qualify and be counted as an Annex I country’s
mitigated emissions. Or, if the monitoring of mitigated emissions is not strict
enough, then less carbon than expected could be removed from the atmos-
phere. However, an OECD report predicts that the maximum amount of
‘free-riding’ or non-additional projects that would be allowed if the small-scale
methodologies were made less stringent and all renewable energy projects in
the region applied for CDM revenues is 3 per cent of the required emission
reductions from Annex I countries [31]. Chandra Sinha, a carbon financer for
the World Bank, contends that until there is a sufficient ‘ridership’, it does not
make sense to worry about ‘freeriders’.
A host of other solutions to promote small-scale project activity have been
proposed. Some of them include allocating more CERs to small-scale projects
since they are typically more additional, letting the small-scale project be
exempt from the 2 per cent adaptation to climate change fund tax on CERs,
and making an even more streamlined methodology for projects under 5MW
[46 and 47]. A more comprehensive list of recommendations can be found in
Chapter 29, ‘Stimulating Investment and Overcoming CDM Barriers’.
Country-specific measures to support or discourage small scale

Some countries have rules that either support or block small-scale project
development. Most of these rules are country-specific, but one rule of the
European Union (EU) for the European Trading Scheme (ETS) II has had a
dramatic impact on all CDM countries. Hydro projects that are over 30MW
must now pass an extra approval process from the World Commission on
Dams in order to be used within the EU. This procedure entails a study of the
impacts on the environment and community near the dam and adds time to the
process of approval [48].
A few countries, such as Ecuador [49], El Salvador [50] and Colombia
[51], have created average baselines of their electrical sector’s operating and
build margins that small-scale project owners can use to calculate emission
reductions. Usually the country’s DNA office is in charge of this task. Before
embarking upon a small-scale project, developers should check to see if the
country of interest has completed a study such as this.
El Salvador has a new Fiscal Incentives Law for the Promotion of

Renewable Energy as of November of 2007 that provides an exoneration of
taxes on renewable energy projects below 10MW for ten years and allows
projects of 10–20MW to be exempt from taxes for five years. Also, projects do
not have to pay taxes on CER revenues [52].
Costa Rica has a National Off-Grid Electrification Programme based on
Renewable Energy Sources, developed by the United Nations Development
Programme, the Global Environment Facility and Instituto Costarricense de
Electricidad. The goals of the programme are to both electrify off-grid sites and
reduce carbon emissions. Two million dollars have been given to the initial
phase, and Phase II will dedicate $19 million. This programme will most
certainly open doors to small-scale, off-grid projects in the country. Whether or
not these small projects earn CDM revenues will depend on if the project will
generate enough CERs to cover the transaction costs and if they are found to
be financially additional with these grants [53].
In Guatemala, a series of laws support small systems. Renewable Energy
Law 52 of 2003 requires distributors and retailers to allow renewable genera-
tors above 5MW to sell to both entities and receive the best price for their
electricity [54]. Having the option to sell to both of these entities allows the
generator to get a more competitive price for the electricity [55]. A new law in
October 2007 allows generation below 5MW to connect to the grid and
requires distributors to purchase their generation [42]. Hydro projects under
5MW have a simplified permit process for using the water and only have to
register for the water usage with the ministry [56]. Similarly, in Peru, no
concession for geothermal or hydro under 10MW is needed from the Peruvian
government [57]. Honduras promotes systems under 3MW by not requiring
them to have a generating licence and being exempt from doing a full
Environmental Impact Statement (EIS) [58].
In Chile, the Short Law I of 2004 provided exemption from transmission
and distribution charges for projects under 9MW and rates that scale with the
size of the project for those between 9 and 20MW. Short Law I also gave gener-
ators under 20MW guaranteed access to the grid and the ability to sell within
the spot market [59]. Also, only hydro under 20MW qualifies for the country’s
10 per cent by 2024 renewable energy mandate [60]. Chile also has an oppor-
tunity for generators under 20MW which allows them to receive up to $60,000
for feasibility studies and up to $12,500 to cover 50 per cent of the PDD costs
[61 and 62].
The Dominican Republic has laws that allow houses or industries that self-
produce from renewable energy to use up to 75 per cent of the investment in
the equipment as an income tax credit and provides a favourable interest rate
for 75 per cent of the cost of equipment for communities that install small-scale
renewable energy and cogeneration projects below 5MW [63].
Despite these incentives, some countries have policies that discourage
small-scale development. In Colombia, generators over 20MW get dispatched
centrally, receive offers and bids in the energy market, and can choose to sell in
138 BARRIERS
the spot or contract market. Plants between 10 and 20MW can only choose to
be dispatched during periods of rationing; at other times, they are not necessar-
ily dispatched on the system. Plants under 10MW are at the greatest
disadvantage in that they only have the option to sell directly to the distributor,
but this distributor is not obligated to buy their electricity. In this system, small
generators can earn only a maximum of the spot price, and the distributor can
go as low as possible for the price in the negotiations. This system makes
dispatch less complicated for the dispatch commission, but is a huge disincen-
tive for small generators [64].
The Ecuadorian DNA office takes a portion of the CERs from projects to
cover the costs of visiting the project to determine if it fulfils the sustainable
development goals of the country. This cost is 20 per cent of the former
UNFCCC registration cost calculation. The percentage of CERs deducted turns
out to be between 3 and 6 per cent. The percentage of CERs taken is based on
the number of CERs generated. The smallest projects are taxed at 6 per cent
and the largest at 3 per cent. The reasoning behind this system of taxation is
that visiting small projects requires the same amount of effort on the part of the
DNA, but fewer revenues would be collected if a set percentage of CERs were
deducted [65]. But, taking up to 6 per cent of CER profits acts as an additional
challenge for small-scale project development.
Conclusion
Efforts to make small-scale projects more viable through the creation of the
streamlined small-scale methodology and the recent PoA methodology show
that the CDM Executive Board is concerned with promoting these types of
projects in order to allow for a more equitable distribution of projects. Critics
of these methodologies claim that transaction costs and project cycle complex-
ity will still deter development. Some countries have recognized the barriers
that face small projects and created policies that support their promotion.
Other countries, however, still allow policies that discourage their promotion.
Appendix A: Calculations for sample CDM revenues

Capacity Factor ⫻ Emission Factor ⫻ MW of Installation ⫻ hours in a year =
CERs generated
CER revenues / (capacity of plant ⫻ hours in a year ⫻ capacity factor of plant)
= $ of CDM revenue/kWh
Capacity factor for sample wind farm = 30 per cent
30,000 CERs (tonnes of CO2 equivalence) must be generated for the typical
carbon broker to be involved.
Emission factor = average of operating margin + build margin
Operating margin = the weighted average of emissions of all generating sources
in the region where the installation is being built
Build margin = the weighted average of emissions of recent capacity additions
Ecuador
For Ecuador, with an emission factor of 0.707 tonnes of CO2/MWh
X ⫻ 8760 hours ⫻ .3 (site-dependent capacity factor) ⫻ .707 tonnes of
CO2/MWh= 30,000
(X = 16MW = minimum size of CDM wind project)
CDM Revenues = 30,000 CERs ⫻ $10/tonne of CO2 = $300,000 (assuming a
CER market price of $10/tonne of CO2)
$300,000 / (16MW ⫻ 8760 hours ⫻ 0.3) = $7.13/MWh or $0.00713/kWh
Percentage of Extra Revenue due to CERs = (0.7¢/kWh) / (9.39¢/kWh) = 7.4
per cent
(Price of electricity (9.39 ¢/kWh) is based on Ecuador’s most recent feed-in
tariff prices for wind energy) [33]
Costa Rica
For Costa Rica, with an emission factor of 0.18 tonnes of CO2/MWh [66]
X ⫻ 8760 hours ⫻ 0.3 (site-dependent capacity factor) ⫻ 0.18 tonnes of
CO2/MWh = 30,000
(X= 63MW = minimum size of CDM wind project)
(It is unlikely that two sites would have the same capacity factor, but the author
used 30 per cent in this example for both the Ecuadorian and Costa Rican
wind sites to emphasize the importance of the country’s emission factor.)
CDM Revenues = 30,000 CERs ⫻ $10/tonne of CO2 = $300,000 (assuming a
CER market price of $10/tonne of CO2)
$300,000 / (63MW ⫻ 8760 hours ⫻ 0.3) = $1.8/MWh or $0.0018/kWh
Percentage of Extra Revenues due to CERs = (0.18¢/kWh)/(6¢/kWh) = 3 per
cent
(6¢/kWh = assumed average wholesale price of electricity in Ecuador.)
Notes
1 This information was not cited to protect the author and parties involved.
2 The actual baseline calculation that is used depends on the type of technology being
replaced, but renewable energy small-scale project developers have their choice of a
few baseline calculations, including the aforementioned one that uses ‘business-as-
usual’ emissions data.
3 This analysis shows a conservative estimate of the requisite sizes of these wind farms
in order to account for possible future price fluctuations in the CER and European
Union Allowance (EUA). This analysis used a price of $10/CER, which was the
average price of CER in 2006 [67].
4 This information is not cited in order to protect the author and parties involved.
5 There are two agro-industries that are large enough to consider CDM revenues for
their operations in Central America. Empacadora Toledo has had positive
140 BARRIERS
experiences with small methane capture systems on its farms and is now in negotia-
tions with Ecoinvest to develop digesters in Guatemala. INDESA palm producers
will be attempting a methane avoidance methodology to create fertilizer with
residue processing water and the unused part of the palm fruit in Guatemala.
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CDM Tech, 21 March, Cartagena, Colombia
4 Gastelumendi, J. (2007) Interview with J. Gastelumendi, Kennedy School of
Government at Harvard University, Master’s of Public Policy student. Former
Head of Environmental Division at Estudio Grau, 4 March
5 McCully, P. and Haya, B. (2007) ‘Failed Mechanism: Hundreds of hydros expose
serious flaws in the CDM’, International Rivers Press Release, 2 December
6 Porta, M. A. (2007) Interview with M. A. Porta, Executive Director of El Centro
de Producción Mas Limpia de Guatemala, 3 September, Guatemala City,
Guatemala
7 FEALAC (2006) ‘Analysis of the present situation and future prospects of the
Clean Development Mechanism (CDM) in the FEALAC member countries’, Study
for the Fourth Meeting of the Economic and Society Working Group of Forum for
East Asia–Latin America Cooperation (FEALAC), Tokyo, 8 June
8 Peters, R. and Brunt, C. (2004) ‘Small-scale CDM project development: Key issues
and solutions’, paper for Pembina Institute for Appropriate Development, January
9 Ley, D. (2007) Interview with D. Ley, United Nations Consultant, Economic
Commission for Latin America and the Caribbean, Mexico Subregional office,
Energy and Natural Resources Unit, 21 April
10 UNDP (2003) ‘Simplified procedures for small-scale projects’, ch 4, The Clean
Development Mechanism: A User’s Guide, Energy and Environment Group and
Bureau for Development Policy of UNDP, New York
11 Michaelowa, A. (2005) ‘Determination of baselines and additionality for the
CDM: A crucial element of credibility of the climate regime’, in F. Yamin (ed)
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Mechanisms, Earthscan Publications, Sterling, VA, pp289–304
12 UNFCCC (2001) ‘Simplified modalities and procedures for small-scale clean devel-
opment mechanism project activities’, Annex II, in UNFCCC COP-7, Marrakesh,
Morocco
13 Michaelowa, A. (2007) Interview with A. Michaelowa, Head of the International
Climate Policy Research Programme, Hamburg Institute of International
Economics, 23 February
14 Bloomgarden, E. (2007) Interview with E. Bloomgarden, US Country Director,
Ecosecurities, 15 March
15 Carmona, C. E. G. (2007) Interview with C. E. G. Carmona, Environmental Team
Leader, Public Utility of Medellín, 20 March, Cartagena, Colombia
16 Martens, J. W., Kaufman, S. L., Green, J. and Nieuwenhout, F. D. J. (2000)
‘Towards a streamlined CDM process for solar home systems: A review of issues
and options’, Energy Innovation, Sunrise Technologies Consulting, and IT Power
17 Trujillo, R. (2007) Interview with R. Trujillo, Sustainable Development Project

Coordinator, Oficina de Mecanismo de Desarrollo Limpio, Bolivia, 18 April
18 CDM Executive Board (2007) ‘Guidance on the registration of project activities
under a programme of activities as a single CDM project activity’, Report 28,
version 02, UNFCCC
19 CDM Executive Board (2007) ‘Guidance on the registration of project activities
under a programme of activities as a single CDM project activity’, Report 32,
version 02, in Annex 38, UNFCCC
20 CDM Executive Board (2007) ‘Procedures for registration of a programme of
activities as a single CDM project activity and issuance of CERs for a PoA’, Report
35, UNFCCC
21 Ellis, J. (2006) ‘Issues related to implementing “programmatic CDM”’,
OECD/IEA Project for Annex I Expert Group, UNFCCC, 27 March
22 Figueres, C. and Newcombe, K. ‘Evolution of the CDM: Toward 2012 and
beyond’, paper prepared for World Bank, Washington, DC
23 Hinostroza, M. , Cheng, C., Zhu, X. and Fenhann, J. (2007) ‘Potential and
barriers for end-use efficiency under programmatic CDM’, paper prepared for
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24 Point Carbon (2008) ‘Brazil aims to host first approved programmatic CDM
project’, Carbon Market News, 16 April
25 Estrada, M. (2008) Interview with M. Estrada, CDM Consultant, 24 April
26 Bosi, M. (2001) ‘Fast-tracking small scale CDM projects: Implications for the
electricity sector’, Information paper, OECD Environment Directorate and
International Energy Agency
27 Bhardwaj, N., Parthan, B., de Coninck, H. C., Roos, D., van der Linden, N. H.,
Green, J. and Mariyappan, J. (2004) Realising the Potential of Small-Scale CDM
Projects in India, IT Power and IT Power India
28 World Bank Carbon Finance Unit (2003) ‘Small scale CDM projects: An
overview’, 14 May
29 Michaelowa, A. and Jotzo, F. (2005) ‘Transaction costs, institutional rigidities and
the size of the clean development mechanism’, Energy Policy, vol 33, pp511–523
30 Carbon Positive (2008) ‘CER prices fall in world markets turmoil’, newsbrief, 4
February
31 Bosi, M. (2001) ‘Fast-tracking small CDM projects: Implications for the electricity
sector’, Information paper, OECD Environment Directorate and International
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Desarrollo Limpio en Ecuador: Un diagnostico rapido de los retos y oportunidades
en el Mercado de Carbono’, report for Banco Interamericano de Desarrollo and
Ministerio del Ambiente and Corporación Interamericana de Inversiones
34 Bürgi, P. (2007) Interview with P. Bürgi, Managing Director, South Pole Carbon
Asset Management, 30 March, Cartagena, Colombia
35 The Gold Standard (2006) Manual for CDM Project Developers, Version 3, May
2006, www.cdmgoldstandard.org/uploads/file/DeveloperManual_GS-CER.pdf
36 Voluntary Carbon Standard Association (2008) ‘About the VCS’, available from
www.v-c-s.org/
37 VER Plus (2008) ‘Overview’, April, available from www.global-greenhouse-
warming.com/VER-plus.html
142 BARRIERS
38 California Climate Action Registry (2008) ‘About’, June, available from

www.climateregistry.org
39 Bongiovanni, Z. (2008) Interview with Z. Bongiovanni, SolFocus Project
Developer, 19 March, Palo Alto, California
40 Bellassen, V. and Leguet, B. (2007) ‘Voluntary carbon offsets: The awakening’,
Research Report #11, Caisse des Dépôts Climate Taskforce
41 Dayal, P. (2007) Standardization of Verified Emission Reductions, UtiliPoint,
IssueAlert, 31 August, available at www.ctrade.org/VERsAugust_31_2007.pdf
42 Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Fundación Solar,
43 Purshouse, C. (2008) Interview with C. Purshouse, Senior Consultant for Camco
International Group, 26 August
44 Gavaldon, H. (2007) Interview with H. Gavaldon, AgCert Field Engineer, Mexico,
20 August, Veracruz, Mexico
45 Porta, M. (2007) Interview with M. Porta, Executive Director, Centro
Guatemalteco de Producción más Limpia, 12 March
46 Sutter, C. (2001) Oral Presentation, C. Sutter, Factor Consulting + Management
Ltd, in UNFCCC COP-7, 6 November, Marrakesh, Morocco
47 Ecosecurities (2002) ‘Clean Development Mechanism: Simplified modalities and
procedures for small-scale projects’, Final Report for the Department for
International Development
48 Brown, M. (2007) Interview with M. Brown, Project Development Manager for
Pacific Hydro, at CORFO Invest, 15 November, Santiago, Chile
50 Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación
de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) –
Guía Latinoamericana del MDL’, Guidebook, available at
www.cordelim.net/extra/html/pdf/library/olade.pdf
52 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the
Caribbean: Two years after the Bonn Conference’, report for United Nations
Economic Commission for Latin America and the Caribbean, April
53 Global Environment Facility (2002) ‘Cover note: Costa Rica: National off-grid
electrification programme based on renewable energy sources’, Project Number
1322, 8 March, http://gefweb.org/Documents/Council_Documents/
GEF_C20/CC_-_Costa_Rica_-_National_Off-grid_Electrification.pdf
54 Congreso de la República de Guatemala (2003) Decreto Numero 52-2003, 10
November, p3
Commission for Latin America and the Caribbean, 16 August, Mexico City, Mexico
57 Netherlands CDM Facility (2005) Netherlands CDM Facility, Poechos I Project
Design Document, UNFCCC, 14 November
58 Comisión Nacional de Energía (2007) Decreto 70-2007, in La Gaceta: Diario
Oficial de La Republica de Honduras, 2 October, Tegucigalpa, Honduras
59 Ministerio de Economía Fomento y Reconstrucción (2004) Ley Corto I: Regla

la Ley General de Servicios Eléctricos, 13 March, Diario Oficial de la Republica de
Chile
60 Ministerio de Economía Fomento y Reconstrucción (2005) Ley Corto II:
Modifica el Marco Regulatorio del Sector Eléctrico, 19 May, Diario Oficial de la
Republica de Chile
61 CORFO and Todochile (2007) ‘Apruba Bases de Llamado a Postulación para
Otorgamiento de Subsidios a Estudios de Preinversión o asesorías especializadas
en Etapa de Preinversión de Proyectos de Energía de Pequeño Tamaño a Partir de
Fuentes Renovables’, report for CORFO Invest Conference, 16 November,
Santiago, Chile
62 Garcia, J. (2007) Interview with J. Garcia, CORFO Renewables Coordinator, 16
63 Congreso Nacional (2007) Ley No 5707 sobre Incentivo al Desarrollo de Fuentes
Renovables de Energía y de sus Regímenes Especiales, May, Dominican Republic
64 Soto, G. C. (2007) Interview with G. C. Soto, Administrator for Comisión
Regulatoria de Energía y Gas, 10 October, Bogota, Colombia
65 Cornejo, J. (2007) Interview with J. Cornejo, Unidad del Cambio Climático in
Consejo Nacional del Medio Ambiente, 24 October, Quito, Ecuador
66 Essent Energy Trading (2007) Tejona Wind Power Project Project Design
Document, UNFCCC, 23 March
Section 3
Country Market Intelligence
for CDM Projects
9
Country-Specific Profiles
Introduction
This section of the book will provide a brief overview of each country’s electri-
cal grid in order to give the reader an idea of the climate for renewable energy
investment. It is essential to analyse each country individually since the general
trends of barriers in Section 2 do not take into account the unique historical,
economic, geographic and institutional circumstances that have a huge bearing
on a country’s suitability for Clean Development Mechanism (CDM) invest-
ment.
Vital statistics
First, vital statistics for CDM development will be presented. These statistics,
which include the portfolio mix of the grid, the country’s emission factor, the
average price of electricity, whether or not the market is privatized, if the
country has capacity payments and a spot market, and the names of the perti-
nent electricity-coordinating institutions, provide a first-order indicator of the
country’s suitability for CDM projects. The portfolio mix and average grid
emission factor of each country will provide a rough idea of the amount of
emission reductions that could be expected. One can get a basic idea of how
lucrative a CDM project would be based on the average residential, and in
some cases, industrial prices of electricity since these prices are what project
developers will be competing against. Whether or not a country’s electrical
sector has been privatized will determine how easily independent power
producers (IPPs) can enter into the market. The presence or absence of a rural
electrification programme will be noted since many off-grid systems run on
renewable energy since fossil fuels may be difficult and expensive to import to
remote areas. Also, some systems like photovoltaic arrays are better suited for
rural areas since they have no moving parts and require little maintenance and
few replacement parts.
Then, in each country-specific chapter, there follows discussion of how
privatized the country’s electrical market is. Considering this factor is key
148 COUNTRY MARKET INTELLIGENCE FOR CDM PROJECTS
since, as Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’,

describes, closed, state-run energy markets offer fewer opportunities for
private investment in power generation and rarely take advantage of CDM.
All Latin American countries went through the process of privatizing
markets at different points in the past 20 years. Now they are in varying stages
of privatization; Chile, Guatemala and Panama are fully privatized and have a
strong set of incentives to promote development while Costa Rica, Mexico and
Uruguay are still primarily served by the state generation, transmission and
distribution company and have limits on the amount of private generation that
can be developed.
Background and privatization

The impetus for privatizing the industry was a result of a lack of governmental
capacity to develop new generation. When each country reached a state of near
emergency for new capacity additions, laws opened up the sector to develop-
ment. However, in most cases these laws did not provide adequate stimulus for
private market involvement and led to the current situation where fossil fuel-
burning generation facilities are rented or elicited for development in order to
fulfil short-term demand in the quickest way possible. The grave situation that
these countries found themselves in for meeting demand occasionally caused
distributors to sign Power Purchase Agreements (PPAs) with these entities for
much higher prices than other generation plants provide. In many parts of
Central America, prices per kWh have surged as a result of recent high oil
prices and now range from about 19 to 30 cents [1]. Even with these new
applications, capacity is just barely meeting demand and there are frequent grid
interruptions. Honduras and Nicaragua have daily outages during peak
demand from 5.00pm to 7.00pm. Even Costa Rica, where Instituto
Costarricense de Electricidad (ICE) has an excellent reputation for reliability,
experienced blackouts in April and May 2007 [2].
Unless otherwise indicated, the reader should assume the following about
the privatized markets:
1 Through privatization, the country set up a spot market that is based on a

least-cost dispatch of resources. Generation that can fulfil demand the
cheapest is dispatched first (unless special laws provide exceptions for
renewable energy). The last generator to fulfil the demand sets the spot
market price that all generators get for a given period of time.
2 Large energy customers are able to negotiate with either generators or
distributors to create PPAs.
3 When moving from state to private ownership, each country set up a
market manager, regulator and tariff-setting committee.
4 Some countries transferred their state-run utilities to private ownership
and others have maintained ownership of these facilities, while allowing
new market entrants. This difference will be specified.
COUNTRY-SPECIFIC PROFILES INTRODUCTION 149
5 In most cases, transmission remained a governmentally owned enterprise,

while generation and distribution were for private operators.
Renewable energy laws

Because open electricity markets have not always promoted sufficient develop-
ment and recent high fossil fuel prices make thermal generation undesirable,
most of these countries have new laws that provide additional incentives for
renewable energy generation that will be discussed in a later section of this
paper. A combination of these laws and high national grid emission factors in
countries that rely on fossil fuels for the bulk of their generation provide excep-
tional opportunities for renewable energy CDM project development.
CDM portfolio
This section will be followed by an analysis of the country’s current CDM
portfolio in table format and prose. The table in each section shows the
projects that are registered or have submitted Project Design Documents
(PDDs) and are in the process of validation. It is important to note that not all
of these projects are registered yet, but most are in the final stages of being so.
The information in these charts is current as of 1 April 2008 and derived from
the Capacity Development for CDM Pipeline. When the information is avail-
able, projects in the pipeline for CDM will be mentioned. It is important to
know that almost every renewable energy project in the region is now consider-
ing CDM revenues. So, when looking at the CDM pipeline and projects, the
reader is getting a sense for almost all of the renewable energy projects that
have been implemented since 2001, when the CDM started, and are planned
for the future.
Special challenges and opportunities

In the next section of each country chapter, the author will discuss special
challenges for the country in question. These challenges may also have been
mentioned in the section on individual types of barriers. They will either be
mentioned only briefly again or elaborated upon. The point of having these
barriers located in both places is to allow readers to use this book topically to
understand barriers in general or as a country-specific guide.
These challenges and opportunities are broken down into sections that
address the country’s Designated National Authority (DNA) office and other
domestic institutional support. The degree to which the DNA office is devel-
oped can have a large bearing on the success of projects. For example,
Venezuela has ratified the Kyoto Protocol, but has not yet even set up a DNA
office and therefore cannot host any CDM projects. In most cases, the DNA
office is a governmental office located within the country’s ministry that
handles energy or environmental affairs. Some countries, such as Ecuador, Peru
and Argentina, have separate promotion offices that are privately run on
donations and hope to sustain themselves on revenues from completing the

CDM project cycle for prospective developers.
Other institutional support can include research institutions, national
laboratories dedicated to renewable energy, or non-governmental organiza-
tions that are taking steps to support the Mechanism. The presence or absence
of carbon brokers is the next subsection that is addressed in this larger section
of challenges and opportunities. The placement of carbon broker offices and
the types of projects they specialize in can explain to a large degree the types of
projects that have been successful in the country. Next, the country’s estimated
renewable energy potential is presented, if studies to assess each resource have
been completed. Unique experiences and situations that affect the success of
CDM projects will then be mentioned.
Summary
Finally, a short summary of the country’s potential for CDM project develop-
ment will conclude each country-specific chapter.
References
10
Argentina
Vital statistics
Portfolio mix: 51.7 per cent from conventional thermal sources (49 per cent
combined cycle natural gas, 34 per cent turbo vapour, 17 per cent turbo gas);
43.1 per cent from hydroelectricity; 13 per cent imported; 5 per cent from
nuclear power [1]
Emission factor: 0.49 tonnes of CO2/MWh [2]
Average price of electricity: 3.79¢/kWh (2004) residential; 3.86¢/kWh (2003)
industrial [3]
Privatized electricity market: yes
Existence of spot market: yes
Capacity payment: yes, $10/MWh for generators available during the peak
demand ($5/MWh for base capacity and $5/MWh for reliability) [4]
Market manager: Market administrator Compañía Administradora del
Mercado Mayorista Electrico SA (CAMMESA)
Policy maker: Secretaria de Energía, Consejo Federal de la Energía Eléctrica
and Consejo Federal de la Energía Eléctrica (CFEE)
Regulator: Ente Nacional Regulador de la Electricidad (ENRE)
Environmental permits: Secretaría de Ambiente y Desarrollo Sustentable

The Argentine peso was devalued in 2001 by 30 per cent and had a profound
impact on the electrical sector [5]. This economic crisis shaped the way the
country shifted from a privatized market to a more regulated one, the fuel
sources available for electrical generation, and the current laws promoting new
renewable energy capacity additions.
Argentina privatized its electric industry in 1993 as a reaction to misman-
agement of the electrical system and sub-par performance by the energy
companies. It followed the Chilean model, but instituted a few differences [6].
Argentina has a least-cost bid auction process that is a bit different from the
energy auctions of its neighbours; the least-cost auction is based on a biannual
declaration of generation costs by generators [7]. Argentina’s auction has price
caps that prevent generators from offering a cost that is too high [6]. Large
consumers and distribution companies can buy energy at a stabilized spot
price. The goal of averaging the spot price is to reduce the volatility for
purchasers [7].
The experiment worked well until 1998 when a recession started. In 2002
Argentine President Eduardo Duhalde decided to devalue the peso by 20 per
cent against the US dollar in an attempt to pull the country out of the four-year
recession [5]. At this time, the government started setting energy prices so that
people could pay their bills. The price for old generators serving residential
customers is now fixed at close to $26/MWh from resolution 1281 of 2006
called Energía Plus [8]. Industrial and commercial generators have a hybrid
fixed and non-fixed price; demand that exceeds 2001 amounts is not on a fixed
price schedule. In order to stimulate new capacity additions, Energía Plus
provides new generation with the real spot market price of close to $65/MWh.
However, the government sets a price ceiling on the amount that generators
can earn [9]. The government also fixed the price for natural gas, which has
discouraged new exploration, and in 2004, with the help of Venezuela, created
ENARSA (Energía Argentina Sociedad Anónima), a state-run gas and petro-
leum company meant to help the country recover from the crisis of 2001, by
preventing supply and capacity shortages.
In 2003, the economy began to recover with an 8.7 per cent growth in one
year [10]. This fast growth, combined with a risky investment climate for new
natural gas exploration, prompted natural gas shortages in 2004 that impacted
65 per cent of the industrial businesses in the province of Buenos Aires. Since
then, Argentina has stopped exporting gas to Uruguay and Chile in order to
use it domestically. Also, these international contracts were dropped because
the peso was linked to the US dollar, and suddenly exporters were earning a
third of what they had previously [11]. Argentina is now experiencing even
more of a natural gas shortage as Bolivia has not had new investments in gas
exploration since the nationalization of the oil and gas sector and has begun
cutting export supplies to Argentina [12].
Because of this changing fuel mix, Argentina is a moving target for
investors interested in CDM potential. The country’s emission factor was 0.3
tonnes of CO2/MWh in the 1990s since almost all generation was derived from
hydro and gas. In 2004, it went up to 0.45 tonnes because natural gas genera-
tion began switching to diesel since there was no new natural gas exploration
after the 2002 devaluation crisis. This trend continued until 2007 when the
emission factor was close to 0.6 tonnes of CO2/MWh [13].
Since 2004 the economy has grown at about 7 per cent each year. It is now
at the point where it was before the crisis. And now, since there was no invest-
ment in new capacity additions after the crisis, energy supply is currently just
meeting demand. To stimulate more development, the government is consider-
ARGENTINA 153
ing re-enacting a stable node price delivered at each interconnection point on

the grid for energy [13].

Because of a lack of new generation capacity and a movement to protect the
environment, in 1998 the government passed a law promoting solar and wind
energy with a one cent (Argentine peso) per kWh production tax credit (PTC)
and a 15-year exemption from paying income tax under Law 25,019 [14].
However, when the Argentine peso fell against the US dollar in 2001, this PTC
was worth almost nothing and therefore did little to promote development. In
2006, with Law 26,190, the Parliament succeeded in passing a twice-failed bill
that provides benefits to more renewable technologies and changed the PTC.
The PTC was reset to 1.5 peso ¢/kWh for wind, hydro under 30MW, biomass
and geothermal, and 0.9 peso ¢/kWh for solar. The hope is to have utilities
source 8 per cent of their generation from renewable sources. This law also
allocated about 1.25 per cent of the National Electrical Energy Fund to develop
wind energy [15]. Some provinces offer additional PTCs that can be applied on
top of the federally offered incentives; for example, Chubut offers an incentive
of 0.5 peso ¢/kWh and Buenos Aires offers a one peso ¢/kWh PTC [9].
Because of the capacity shortage during the winter of 2006, several large
companies are beginning to take advantage of this PTC by trying to generate
their own energy in order to avoid having interruptions. Sugarcane companies
in the north of the country have begun to buy more efficient boilers to burn the
bagasse and supply themselves. Oil extraction companies like Panamerican
Energy with a 40MW wind project in Patagonia have also begun to invest in
autosupply resources [13].
CDM portfolio
Argentina hosts the first wind farm to be registered for the CDM in the Latin
American region; 15MW ‘Antonio Morán Wind Park’ was registered in
December of 2005 and is operated by local cooperative Comodor Rivadavia.
However, there are no other wind CDM projects in the pipeline or slated for
immediate development.

Local DNA office
Argentina has divided its DNA office into regulatory and promotion arms. The
regulatory arm is located within the climate unit of the Secretary of
Environment and Sustainable Development. The office has an Executive
Committee, composed of governmental representatives in the Ministries of
Energy, Transportation, Agriculture, Industry, Science and Technology, and
Foreign Affairs, and an Advisory Committee, which is made up of private
sector representatives, non-governmental organizations (NGOs), and acade-
10
9
8
Number of projects
7
6
5
4
3
2
1
0
Hydro Wind Geothermal Landfill Non-landfill Biomass
methane methane
capture capture
Pipeline Analysis and Database, 1 April
Figure 10.1 Projects registered or in validation in Argentinaa
mics [16]. The official website for the office provides some basic information,
but the main source of CDM capacity building is done through the promotion
arm.
The promotion arm is the Argentine Carbon Fund which helps projects in
the initial stages of CDM registration, and was established by a presidential
decree in 2005. The fund has completed many Project Design Documents
(PDDs) and receives as its payment 1 per cent of the CERs generated from
projects. However, no projects that it has helped facilitate have achieved regis-
tration and earned CERs yet. Also, even though the title of the organization is
‘Fund’, it has no money to offer to projects. Donations sustain the office, and
as of November 2007 it had enough donations to operate for about six more
months. This fund also sponsored a study to assess the potential for methane
capture from the agro-industry [8].
Other domestic institutional support

There is institutional support for methane capture and renewable energy in
the form of two national institutes: INTA (Instituto Nacional de Technología
Agropequaria) and INTI (Instituto Nacional de Tecnología Industrial), which
co-chair a methane-to-markets initiative, and support fisheries, agricultural
industries and technological sectors through research and investigation.
Argentina’s Secretary of Energy did a calculation of the national grid’s
carbon emission factor. This data, which has been made public, could help
small-scale project developers reduce CDM transaction costs as this average
grid emission factor could be used as a baseline [17]. There is a wind
research centre (El Centro Regional de Energía Eólica) that has been operat-
ing since 1985 in Chubut, a region in the southern part of the country in
Patagonia. Work from this centre facilitated a wind energy potential map of
the country [18].
ARGENTINA 155
Other than these research institutes, there are some private and state-
funded technology-creation initiatives. INVAP is a small, state-initiated
research facility, and a local wind turbine manufacturer. NRG Patagonia is a
new turbine manufacturer that has a 1.5MW turbine [9]. IMPSA, another local
turbine manufacturer with competency in a variety of water and wind turbines,
has a plant in Argentina and is building one in Brazil for a 300MW farm.
IMPSA has designed a turbine to operate at high variable speeds without using
gears to control the blade speed, which lower the turbine’s efficiency [19].
However, IMPSA’s launch of a test turbine in Argentina was a failure when in
high winds it fell and injured three men [20].
Carbon brokers
Carbon brokers have a strong presence in Argentina, which allows for local
project support and knowledge about the Mechanism. These brokers develop
new methodologies that can be used for projects that typically may not achieve
registration. MGM International was started and is headquartered in Buenos
Aires, and Ecoinvest has a large office there as well [13 and 21]. Ecosecurities
and the French carbon broker Ecosur have plans to open offices in Buenos
Aires [9].
Renewable energy potential

Even though some biomass sugarcane producers have begun to take advantage
of more efficiently burning their bagasse, there are still about 400MW of
potential that could be tapped and connected to the national grid [22]. Four
sites are being studied for their geothermal potential [22]. There are about
25GW of small hydro potential [23]. Solar and wind energy have not been
studied extensively to give resource estimates.
Unique experiences and situations

Argentina was once split between two grids, one in the northern part of the
country and one in Patagonia. Now the two grids are connected, which allows
developers to take advantage of the high wind speeds in Patagonia with large
projects that serve the needs of the population in the north. However, there is
some debate about how desirable the wind regime in Patagonia is since the
winds tend to be very strong at 14–16 metres/second (m/s), or non-existent,
which do not lend themselves well to the current most common large (1.5MW
and above) turbine designs, which consist of large components that are not
robust enough to endure rough winds and are optimized to capture steady
wind speeds of about 9m/s [9].
Wind energy in Argentina must complete an Environmental Impact
Statement (EIS) that follows the manual created for thermal generation. This
manual is long and cumbersome. Therefore, it creates additional barriers for
wind developers [9].
Summary
Argentina has tremendous potential for renewable energy CDM projects
because of its current capacity shortage, excellent resource potential, revised
production tax credit (PTC) and growing economy. However, the devaluation
of the peso in 2002 may have scared investors away. If the economy continues
to grow as it has and new natural gas exploration investments are not made,
Argentina could be poised to have rapid growth in renewable energy projects
as new capacity must be sourced, and PTC and CDM revenues can be earned
with the construction of these projects.
References
1 Asociación Argentina de Energía Eólica (2006) ‘Matriz mensual de generación
bruta (en GWh)’, Boletín electrónico, no 10, September, available at www.argenti-
naeolica.org.ar/, accessed 13 February 2008
2 Aceitera General Deheza (2007) Bio energy in General Deheza – Electricity gener-
ation based on peanut hull and sunflower husk Project Design Document,
UNFCCC, 10 February
3 World Bank (2003) Benchmarking data of the Electricity Distribution Sector in the
Latin American and Caribbean Region 1995–2005, available from
http://info.worldbank.org/etools/lacelectricity/, accessed 20 February 2008
4 Gülen, G. (2002) ‘Resource adequacy and capacity schemes’, paper prepared for
Institute for Energy, Law & Enterprise at the University of Texas at Austin
5 BBC (2002) ‘Cautious reaction to peso devaluation’, BBC News, Business, 7
January
6 Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation:
Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3,
September, pp196–207
7 Energy Sector Management Assistance Program (ESMAP) (2007) ‘Latin America
and the Caribbean Region (LCR): Energy sector – retrospective review and
challenges’, report, 15 June
8 Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono,
9 Garcia, A. (2007) Interview with A. Garcia, Project Developer for ABO Wind, 22
10 Rohter, L. (2004) ‘Energy scarce as Argentina faces winter’, The New York Times,
31 March
11 Warton, U.K. (2004) ‘Short circuits in Argentina’s energy crisis’,
Knowledge@Wharton, Special Issue, 2 June, Wharton School of the University of
Pennsylvania
12 Thomas Financial News (2008) ‘Oil and utilities highlights’, briefing, Hemscott
Group Limited, 28 January
13 Piquero, E. (2007) Interview with E. Piquero, Carbon Consultant MGM
International, 22 November, Buenos Aires, Argentina
14 El Senado y Cámara de Diputados de la Nación Argentina (1998) Régimen
Nacional de Energía Eólica y Solar: Ley 25,019, 7 December, Boletín Oficial
15 El Senado y Cámara de Diputados de la Nación Argentina (2000) Régimen de
Fomento Nacional para el Uso de Fuentes Renovables de Energía Destinada a la
Producción de Energía Eléctrica: Ley 26,190, 5 July, Boletín Oficial
ARGENTINA 157

Caribbean’, report for Inter-American Development Bank, 2 June
17 Secretary of Energy of Argentina (2006) ‘Cálculo del Factor de Emisión de CO2,
de la Red Argentina de Energía Eléctrica’, available from
http://energia3.mecon.gov.ar/contenidos/verpagina.php?idpagina=2311, accessed
25 February 2008
19 Guerra, E. (2007) Interview with E. Guerra, IMPSA Financial Manager, 22
20 Diario CRONICA (2006) ‘Se desmoronó el primer molino eólico fabricado en el
país: 3 heridos’, 18 July, Comodoro Rivadavia, Chubut
22 Servant, M. (2007) Interview with M. Servant, Director of Renewable Energy,
Secretary of Energy, 22 November, Buenos Aires, Argentina
23 Secretaría de Energía de La Nación / Coordinación de Energías Renovables /
Dirección Nacional de Promoción (2005) ‘El Potencial de los Pequeños
Aprovechamientos Hidroeléctricos en la Republica Argentina’, proceedings of
20th Conferencia Latinoamericana de Electrificación Rural, Cuenca, Ecuador, 2
May
11
Belize
Vital statistics
Portfolio mix: 33 per cent hydro; 33 per cent diesel; 33 per cent imported from
Mexico [1]
Emission factor: n/a
Average price of electricity: 44¢/kWh residential [2]; industrial n/a
Privatized electricity market: None, although permitted by law
Capacity payment: n/a
Market manager: Belize Electricity Limited (BEL)
Policy maker: BEL and Public Utilities Commission (PUC) led National Energy
Plan recommendations in 2003
Regulator: PUC
Environmental permits: Department of the Environment (DOE) within the
Ministry of Natural Resources and the Environment

The installed capacity in Belize in 2002 was approximately 75MW in total, with
25MW coming from hydro, 25MW from diesel and 25MW from imported
Mexican generation. The lack of indigenous conventional energy resources such
as petroleum, natural gas or coal in the country has led to this high rate of
importation. Belize plans on satisfying its future demand with a series of hydro-
electric plants and improving the efficiency of its diesel plants [1].
Belize’s state-run utility became privatized with the Electricity Act of 1992.
However, instead of allowing for a competitive marketplace, in 1993 the
government issued a licence that granted the state-run company, Belize
Electricity Limited (BEL), the exclusive rights to generate, transmit and supply
electricity for 15 years. Residential electrical rates in Belize tend to be very high
at an average of 44¢/kWh. BEL is currently applying for a rate increase to
50¢/kWh. BEL sites the high costs of diesel fuel at 50¢/kWh, the Mexican rate
of imported energy at 30¢/kWh, and the cost of domestic hydro at 18¢/kWh as

the reason for this rate increase [3]. The Public Utilities Commission of Belize
oversees the tariff-making structure in the country [4].
CDM portfolio
None

The prospects for CDM in Belize are not optimistic given that the country has
not yet set up a Designated National Authority (DNA) office and there are no
renewable energy incentives for Belize. This slow movement, despite Belize’s
ratification of the Kyoto Protocol in 2003, could be a result of the lack of
opportunities for CDM project development because of the country’s small
industrial sector and closed, state-run electricity market.
The large amount of hydro and imported electricity, which are both
counted as zero for emission factor calculation purposes, could cause Belize to
have a low emission factor that would not make renewable energy develop-
ment worthwhile. Since no CDM projects exist at this point, no one has
calculated the country’s average emission factor.
Summary
Belize shows potential for CDM opportunities because of its high prices of
electricity, but the monopolistic nature of the state-run utility prevents develop-
ment from occurring. The 15-year licence to allow BEL to operate the system
should expire in 2008, allowing the marketplace to be open to private invest-
ment. Given the lack of CDM interest in the country, however, the prospects
for CDM development are currently not very promising.
References
the Latin American and Caribbean Region 1995–2005’, available from
http://info.worldbank.org/etools/lacelectricity/, accessed 1 March 2008
3 Sampson, D (2008) ‘BEL applies to PUC for a 15 per cent average rate increase
following Threshold Event’, press release, 14 March, Belize Electricity Limited
4 Sampson, D. (2007) ‘Approved electricity tariff structure’, press release, 1 July,
Belize Electricity Limited, available from www.bel.com.bz/press_releases/
27062007-1.pdf, accessed 1 March 2008
12
Bolivia
Vital statistics
Portfolio mix: 65 per cent thermal (natural gas, coal, petroleum); 35 per cent
hydro; <1 per cent other renewables [1]
Average price of electricity: 6.1¢/kWh residential; 4.3¢/kWh industrial [3]
Capacity payment: Yes, and penalty of $1500/MWh for non-delivery [3 and 4]
Market manager: Comité Nacional de Despacho de Carga (CNDC)
Policy maker: Viceministro de Electricidad y Energías Alternativas, within the
Ministerio de Hidrocarburos y Energía
Regulator: Superintendencia de Electricidad (SE)
Environmental permits: El Ministerio de Desarrollo Rural, Agropecuario y
Medio Ambiente (MDRAyMA)

In 1968, the electrical sector was regulated with the Code of Electricity (D.S.
08438), which supported the vertical integration of the sector and created the
Empresa Nacional de Electricidad (ENDE). Then, the Electricity Law (1604) of
1994 sought to improve efficiency in the sector by introducing competition and
supporting investments. This market consists of a spot market that inputs
dispatch based on least-cost generation and allows large consumers to create
Power Purchase Agreements (PPAs) with generators [5].
With this restructuring, ENDE was privatized, creating three new compa-
nies called Corani, Guaracachi and Valle Hermoso. Until 1999, it was only
these companies that could by law operate in the new market [6]. Now, these
companies control 70 per cent of the total generation and five other private
companies have begun generation [5].
Bolivia has two major grids, the central national grid (SIN) and several
isolated, distributed grids (Aislado). Companies within SIN must be vertically
unbundled, but those that serve the isolated areas can provide generation,
transmission and distribution [5]. The country’s topography makes it difficult
to serve all of its citizens and the population in the northern and western parts
of the country are served by these isolated grids or do not have electricity. The
country’s electrification rate is one of the lowest in the region at 67 per cent.
Eighty-seven per cent of urban dwellers have electricity while only 30 per cent
of rural populations have access [7].
The country could face a dire capacity shortage soon since the generation
capacity reserve is predicted to be inadequate by 2009. There has been a lack of
new capacity additions because of the political and economic instability of the
country [5].

There are no specific laws to support renewable energy in Bolivia. Because of
the large portion of the population without electricity, there have been several
state and aid organization programmes to provide better coverage, primarily
through the use of renewable energy. The state programmes include the
National Rural Electrification Programme (PRONER), Plan Bolivia para
Energía Renovable (PLABER) and the Rural Electrification Decree of 2005.
Under current president, Evo Morales, the Common Fund for Universal Access
to Public Electricity Service (FOCO) and Electricity for Living with Dignity
were two initiatives started in 2006 [8 and 9].
The effort to spread renewable energy to rural populations is so common
in Bolivia that the plethora of solar home systems that have been installed as a
result of these rural electrification programmes have necessitated installation
guidelines and rules (Norma 1056) to ensure quality performance [10].
4
3
Number of projects
0
methane methane
capture capture
Figure 12.1 Projects registered or in validation in Bolivia

BOLIVIA 163
CDM portfolio
The CDM portfolio in Bolivia is currently limited. The graph above shows the
projects that are in the process of validation or already registered. The registered
projects consist of a landfill gas capture project called Santa Cruz and a bundled
run-of-river hydro project called Rio Taquesi. A rural electrification project that
would have replaced low-voltage diesel generators with renewables was rejected
for registration because it began operations before the Marrakesh Accords
creating the CDM occurred. Also, the baseline methodology used for this
project was inappropriate [11]. As of April 2007, there were several projects,
including five hydro, five forestry, two landfill gas, one geothermal, one biomass
for burning the shell of Brazil nuts, one cogeneration and one wastewater
methane capture, that were in the preliminary steps of the CDM [12].
Beyond these compliance projects, an NGO called the Centro de
Desarrollo de Energía Solar (CEDESOL) has a project known as Kyoto Twist
that seeks both private and public sector participation through the purchase of
Voluntary or Verified Emission Reductions (VERs) [13].

Local DNA office
The Bolivian Designated National Authority (DNA) office (Oficina de
Desarrollo Limpio (ODL)) is unique in that it is located outside of any govern-
mental department. It is privately-run, but overseen by the Inter-Institutional
Council on Climate Change in the Ministry for Sustainable Development under
the Vice-Ministry for Natural Resources and the Environment. Initially, when
it was active from 2002 to 2005, it operated on money donated by the United
Nations Environment Programme (UNEP), the Dutch Embassy and Risø’s
Capacity Development for the CDM [14].
Now, it derives its operating budget from taxing CER revenues. The idea of
taxing CER revenues was born in a National Strategy Study for CDM in
Bolivia sponsored by the Ministry of Sustainable Development and Planning
and the World Bank [15]. The study says ‘CDM host governments are encour-
aged to ensure that part of the CDM surplus is retained in the host country. For
this reason, as a complementary way to credit-sharing arrangements, a taxing
regime analysis, which could offer major advantages to both host countries
and investors, is presented instead’ [15].
Bolivia has heeded this National Strategy Study recommendation and is
creating a decree that regulates the taxes of CERs. Leaders are considering
taxing the CERs of large-scale projects between 15 and 35 per cent. However,
Bolivia is considering waiving this tax for small-scale projects [16]. Forty
per cent of these taxes go to cover the costs of approving the project and
operations of the CDM office. Sixty per cent of these taxes go to mitigation
and adaptation activities in Bolivian communities [17]. The ODL’s website is
highly developed with a library, CDM-related events bulletin, project list and
guide for developers [18].

A few institutional support networks other than the national CDM office exist
for renewable energy project developers. CINER (Centro de Investigation de
Energía Renovable) is based in Cochabamba and has a library of material for
developers, publishes a monthly renewable energy magazine and offers courses
and seminars for developers. The International Finance Corporation and
Transportadora de Electricidad of Bolivia sponsored a wind map of the
country [19]. Also, the Vice-Ministry of Electricity and Alternative Energy
created a wind map of the country in April 2008 [20]. The aforementioned
governmental programmes, meant to help increase rural electrification rates,
are complemented by participation from a variety of international groups such
as the Global Village Energy Partnership, Intermediate Technology
Development Group, Inter-American Development Bank, the World Bank,
Global Partnership on Out-Based Aid, the German Agency for Technical
Cooperation and the Corporación Andina de Fomento.
Carbon brokers
There is one carbon broker called Natsource that has a small office in the
country, but the main mission of the office is not to develop CDM projects
domestically. Instead, Natsource’s core business in carbon trading is to aggre-
gate CERs and resell them. The CDM projects that have been developed in the
country have been contracted by outside firms like C-Trade Comercializadora
de Carbono Limited from Rio de Janiero, which wrote the Project Design
Document (PDD) for the existing hydro project, and Grontmij Climate &
Energy BV of The Netherlands, which completed the successfully registered
landfill gas PDD.

The wind energy map completed by the International Finance Corporation and
the Transportadora de Electricidad of Bolivia showed excellent wind potential
in the southeast corner of the country with average speeds of 7–8.8m/s [19].
Otherwise there have been few studies to assess potential. Information from
Bolivia’s neighbors, Peru and Chile, suggests that there are both excellent solar
and hydro resources in the Andes.

The most overwhelming barrier to project implementation in Bolivia is the
carbon tax imposed by the national government. The amounts taken are
significant and will discourage project developers. However, allowing the DNA
office to exist outside of the government is helpful in that it could promote
projects in a more timely fashion and avoid the institutional rigidities imposed
by the government. Having the office earn a portion of the CERs provides a
natural incentive for the office to be efficient and promote activities. However,
this natural incentive also creates a conflict of interest since the DNA office is
meant to be not only promotional, but also regulatory. Since it is in the interest
BOLIVIA 165
of the office to accept projects and earn a portion of the CERs generated, it
may apply lax sustainable development criteria.
Beyond the inability to earn the full value of the CERs produced, the
country’s volatile political and economic past further discourages investors.
Most recently, the country’s president, Evo Morales, nationalized hydrocarbon
extraction. This decision caused waves in the private sector because of its
strong participation in country’s huge natural gas extraction industry, which
was 466 billion cubic feet in 2006 [1].
Bolivia may extend this nationalization to the electrical sector. Like
Ecuador, Bolivia is in a position of insufficient capacity because of a lack of
private investment. Morales may follow Ecuador’s president, Rafael Correa, in
making moves to renationalize the sector with the hope of installing large
hydro dams backed by the government. Or, Morales may realize the huge
potential in using natural gas to supply the electrical sector and invest in
combined-cycle gas installations that have low initial investment costs.
Already, the natural gas usage in the country has increased from 25 per cent in
2005 to 37 per cent in the electrical sector in 2005 [1]. Nationalizing the sector
would discourage private investors and CDM development.
Bolivia’s economic and political risk makes the country have a C rating for
loans, which suggests that there is a high likelihood that the loan will not be
repaid. This rating makes lenders such as the World Bank, International Finance
Corporation, Corporación Andina de Fomento and the Inter-American
Development Bank hesitant to make investments in the country. When loans are
awarded, there are often qualifiers and restrictions on the funds they provide.
These restrictions are onerous for project developers to meet [3].
Hydro and other renewable energy generation projects with high first costs
face a disadvantage in the marginal cost dispatch of the Bolivian grid. Building
incremental natural gas additions to existing plants incurs low first costs. These
generators can then bid an energy price in the auction that is below the average
cost of new hydro generation, which incorporates the capital intensive dam-
building costs. In this way, natural gas generators have assured dispatch, and
hydro developers find it difficult to compete. The capacity payment that the
Bolivian government pays is not high enough to compensate hydro generators
for these low energy payments [3].
Bolivia has an advantage for CDM development over most other South
American countries because it utilizes hydroelectricity for only 35 per cent [1]
of its generation. The higher level of fossil fuels in the portfolio mix than in
that of its neighbours yields more emission reductions.
In comparison to other countries in the region, however, Bolivia has a low
average residential tariff of 6.14¢/kWh. The Latin American region’s average
residential tariff is 11.5¢/kWh [21]. Therefore, independent power producers
(IPPs) in Bolivia, in general, could not expect to earn as much for their genera-
tion [3].
While there are currently few social problems with hydro development,
future installations could face opposition because of Bolivia’s tumultuous
history with the privatization of water rights. During the wave of privatization
of all industries in the late 1990s in Latin America, the city of Cochabamba
relinquished its role in providing water to households and businesses. A local
company, owned primarily by California-based Bechtel, developed a project
that increased customer rates by double and triple. Cochabamba citizens rioted
and forced the company out of the country [22]. This type of mobilization of
Bolivian citizens against private companies’ participation could portend a
gloomy future for IPPs unless they work closely and collaboratively with
communities to ensure project success.
Beyond these potential social problems, the dramatic topography of the
country makes it difficult to access hydro sites and transmission lines [3].
Summary
Bolivia has not yet experienced much CDM activity because of the high taxes
proposed on CERs, the climate of political and economic instability which
complicates the process of qualifying for loans, and the low price of energy
because of the country’s plentiful natural gas reserves. It could show growth if
the CER tax is lowered or eliminated, the current capacity shortage becomes
dire and the grid emission factor continues to grow as more natural gas is
utilized for electrical production.
References
1 Energy Information Agency (2006) Country Analysis Briefs: Bolivia, available
from www.eia.doe.gov/cabs/Bolivia/Background.html
2 C-Trade (2006) Rio Taquesi Hydroelectric Power Project Design Document,
UNFCCC, 15 September
Latin America and the Caribbean 1995–2005’, available from
4 Tardio, M. (2006) ‘Asignación de pagos por capacidad en sistemas hidrotérmicos’,
Superintendencia de electricidad, presentation at the Fifth Congreso
Latinoamericano y del Caribe de Gas y Electricidad, Buenos Aires, 15–18 May
5 Unidad de Analysis de Políticas Sociales y Económicas de Bolivia (2005) ‘Sector
Eléctrico (2000–2004)’, November, report available at www.udape.gov.bo/
diagnosticos/documentos/Documento%20Sector%20Electrico.pdf
6 Barja, G. and Urquiola, M. (2003) ‘Capitalization and privatization in Bolivia: An
approximation to an evaluation’, report for Centre for Global Development,
Washington, DC
7 Ministerio de Obras Publicas Servicios y Vivienda Viceministerio de Electricidad y
Energías Alternativas (2007) ‘Programa “Electricidad para vivir con Dignidad”’,
año 1, no 3, September, report for UNDP and Global Opportunities Fund,
available at www.hidrocarburos.gov.bo/Noticias/Publicaciones/publicacion3.pdf
8 ESMAP (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector –
retrospective review and challenges’, 15 June, Energy Sector Management
Assistance Programme, World Bank, Washington, DC
BOLIVIA 167
9 Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008)

‘Electricidad para vivir con dignidad’, April,
www.hidrocarburos.gov.bo/07_PLAN/plan.php, accessed 10 March 2008
10 Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008)
‘Normativa’, April, www.hidrocarburos.gov.bo/07_NORMATIVA/normativa.php,
accessed 10 March 2008
11 CDM UNFCCC Project Search, 1 May 2008,
12 Trujillo, R. (2007) Interview with R. Trujillo, DNA of Bolivia, 22 April
13 CEDESOL (n.d.) ‘Solar cooking is a salvation for us’, Newsletter, Centro de
Debarrollo en Energía Solar, www.cedesol.org/, accessed April 2008
Caribbean’, report for Inter-American Development Bank, Washington, DC
15 National Strategy Studies Program (2001) ‘National Strategy Study for the partici-
pation of Bolivia in the CDM’, report for Ministry of Sustainable Development
and Planning and World Bank, Washington, DC
16 Trujillo, R. (2008) Interview with R. Trujillo, Designated National Authority of
Bolivia, 16 April
17 Jáuregui, S. (2003) ‘Elementos fundamentales de la norma para la regulación del
comercio de emisiones en Bolivia (Ley del Carbono)’, Oficina de Desarrollo
Limpio, May
18 Oficina de Desarrollo Limpio, www.odl.gov.bo, accessed 3 April 2008
19 Viceministro de Electricidad y Energías Alternativas (2008) ‘Mapa Eólico de
Bolivia’ (Wind Map of Bolivia), available at http://www.hidrocarburos.gov.bo/
vmeea/index.php
20 Business News Americas (2008) ‘VMEEA releases country’s 1st wind map:
Bolivia’, 16 April
21 World Bank (2003) ‘Benchmarking Data of the Electricity Distribution Sector in
the Latin American and Caribbean Region 1995–2005’,
http://info.worldbank.org/etools/lacelectricity/, accessed 15 April 2008
22 Watson, C. (2003) ‘Sell the rain: How the privatization of water caused riots in
Cochabamba, Bolivia’, newscast, Canadian Broadcasting Centre Radio, 4
February
13
Brazil
Vital statistics
Portfolio mix: 83.8 per cent hydro; 4.2 per cent other renewable; 3.7 per cent
nuclear; 3.6 per cent natural gas; 3.2 per cent coal; 1.5 per cent oil [1]
Existence of spot market: power pool
Capacity payment: no, obligation to contract [4]
Market manager: Operador Nacional do Sistema Elétrico (ONS)
Policy maker: Council of Management of the Electric Energy Crisis (Câmara
de Gestão da Crise de Energia Elétrica (GCE)
Regulator: Agência Nacional de Energia Elétrica (ANEEL) and Comitê de
Monitoramento do Setor Elétrico (CMSE) and Empresa de Planejamento
Energético (EPE) (monitors the new power pool)
Environmental permits: Ministério do Meio Ambiente (MMA)

Brazil’s electrical sector was privatized in 1997 with the Petroleum Investment
Law, which restructured the electrical and energy sectors. Part of the impetus
for this bill was to stimulate domestic and foreign investments in new capacity
additions [5]. In 2008, 28 per cent of generation companies were privately
owned. The state-run utility, Centrais Elétricas Brasilieras (Electrobras) owns
60 per cent of the installed capacity. Tractebel Energia is the largest privately
owned company with about 10 per cent of the country’s installed capacity [6].
Brazil’s electrical grid is made up mainly of hydro resources. This situation
makes the country susceptible to major electrical power shortages in times of
drought. During 2000–2001, a major drought struck the country and caused
the government to implement a rationing programme. A special organization
called Câmara de Gestão da Crise de Energia Elétrica was formed to handle
this situation and reduced electricity consumption by 20 per cent through an

education campaign and by implementing penalties for excess consumption
and incentives for energy savings [7].
In 2000, because of this power shortage, the government also implemented
the Thermoelectric Priority Plan for 17GW of new thermal capacity to provide
backup for the hydro generation on the grid. This plan included a take-or-pay
contract, stipulating that the distributors must pay for the generation whether
or not they need it. This plan therefore favoured the thermal generation
companies. The aforementioned energy reduction programme and grid
improvements resulted in excess supply that negatively impacted some non-
thermal generation companies and distributors since they were not needed in
the dispatch [2].
Despite the supply excess in the early 2000s, the country’s high demand
growth, which averaged 5.4 per cent annually between 1980 and 2000,
mandates frequent new capacity additions [7]. The Ministry of Mines and
Energy predicts that natural gas, coal and nuclear generation will increase by
297 per cent, 300 per cent, and 150 per cent respectively while hydro genera-
tion will decrease by 15 per cent by 2015 [2].
In 2004, a new model for the electricity sector based on a power pool,
known as Ambiente de Contratação Regulado (ACR) was passed by Congress.
The goal of this new power system is to reduce price fluctuations for market
participants and consumers and allow the system to better predict needed
capacity additions. This system consists of distribution companies estimating
their demand and contracting it for three to five years. A newly formed
committee will then determine how much additional capacity will need to be
built and will contract that amount from generators. In this way, the model
represents a hybrid between a publicly and privately owned sector. The govern-
ment shares the risk with multiple buyers in this situation. The price that
participants of this distribution pool receive will be stable and long term, and
will not vary between companies. Large consumers can continue to make
Power Purchase Agreements (PPAs) with generators outside of this pool [7].
Time will tell the impact that this new system has on distributors and genera-
tors, and how well the committee predict future demand requirements.

Brazil’s Incentives Programme for Alternative Sources of Electric Energy
(PROINFA) supports new hydro under 30MW, biomass and wind develop-
ment through two phases of implementation. The current feed-in tariff is set at
an average of $74(135 reais)/MWh for hydro and $76(140 reais)/MWh for
biomass and wind. The exact feed-in tariff a developer will receive depends on
the capacity factor of the site for development; those sites in less favourable
wind regimes earn higher tariffs [8]. Under PROINFA, wind developers also
get a 20-year PPA for installations and special loan rates for 80 per cent of the
project costs [9].
BRAZIL 171
Table 13.1 Summary of Brazilian renewable energy mandate (PROINFA)
Amount Incentive Target PPA length % of

required structure dates components
sourced locally
Phase I 1422MW wind, Feed-in tariff 2008 20 yrs 60%
1191MW small hydro,
and 685MW biomassa
Phase II 10% generation Proposed rate 2022 15 yrs Proposed 90%
increase of
0.5% per year
Note: a These are revised, not original, PROINFA capacity requirements.
Source: Feitosa, E. A. and Carla, A. (2006) ‘Brazilian Wind Energy Programme: Status and perspectives’, presenta-
tion at the Fifth World Wind Energy Conference, New Delhi, 6–8 November
The Phase I amounts had to be revised after it was found that they were
unattainable for biomass generators. The capacity requirements shifted from
1100MW of each type of technology to weigh more heavily on the hydro and
wind portions with the new required additions of 1422MW wind, 1191MW
small hydro and 685MW biomass [8].
There are several rural electrification programmes in Brazil. The US and
Germany began an initiative in 1993 to install 1500 solar home systems. Since
1994, the Brazilian government has implemented four programmes (CRESESB,
PRODEEM, PAEPRA and Luz para Todos) for electrification of rural areas
with renewable energy [10 and 4].
CDM portfolio
Overall, the Brazilian Clean Development Mechanism (CDM) market has been
a success with 71 per cent of Latin American reductions derived from projects
100
90
80
Number of projects
70
60
50
40
30
20
10
0
methane methane
capture capture
Figure 13.1 Projects registered or in validation in Brazil

in Brazil [11]. The large agro-industry and many developed cities provide it
with ample opportunities for methane capture. Hydro and biomass projects,
which were not new to Brazil, have also enjoyed much CDM success.
The PROINFA legislation has stimulated much new growth in the wind
energy sector. The main interested wind parties in Brazil are Elecnor/Enerfin,
Enerbrasil/Iberdrola, Petrobras, Central Nacional de Energia Eólica
(CENAEEL), a Brazilian private wind developer, Companhia Energetica do
Ceara (COELCE), Companhia Paranaense de Energia (COPEL) and Centrais
Elétricas de Santa Catarina SA (CELESC) [12].

DNA Office
The Brazilian Climate Change Programme was initiated in 1996 with grants
for $1.5 million by the Global Environment Facility and $400,000 from the
‘US Country Study Program’. It has been sustained by funding from national
entities such as the National Electrical Energy Agency, Electrobras and the
Brazilian Institute for Environment and Natural Renewable Resources [13]. In
July of 1999, this programme was upgraded to an Inter-Ministerial
Commission called Comissão Interministerial de Mudança Global do Clima
(CIMGC) and works in conjunction with the General Global Climate Change
Coordination (GCCC) [11 and 13].
Brazil was instrumental in helping to develop the CDM. During the third
Ad Hoc Group on Berlin Mandate in 1997, the Brazilian negotiators recom-
mended the creation of a Clean Development Fund where penalty fees from
entities with reduction obligations would go towards funding climate change
mitigation and adaptation activities in developing countries [13 and 14].
The Designated National Authority (DNA) office is located in the CIMGC
of the Ministério da Ciência e Tecnologia (MCT). It has determined that its
mission is exclusively regulatory and considers project promotion to be the
duty of the private sector. However, it has made presentations, hosted seminars
and has written an ‘Orientation Guide for CDM’ [13].
The process by which projects earn national approval includes an analysis
of the sustainable development component of the project by reviewing the
Project Design Document (PDD) and validation report in Portuguese. The
office considers local environmental sustainability, labour conditions and net
job generation, income distribution, technological and capacity building devel-
opment, and regional integration as factors to determine sustainable
development [13].

There are a multitude of other institutional support networks available for
project developers. The DNA office’s hands-off policy on promotion activities
is not indicative of all governmental programmes. The country’s aggressive
ethanol programme called Pró-Álcool in the 1970s was heavily subsidized by
BRAZIL 173
the government when fossil fuel prices preventing it from competing with
market prices. Now, the government is supporting methane capture and avoid-
ance projects [13]. Brazil plans to be one of the first countries to submit a
Programme of Activities (PoA) methane capture project [15].
National efforts for biofuels and renewable energy include the following:
IBAMA (Brazilian Institute for Environment and Natural Renewable
Resources), Brazilian Centre for Wind Energy of the University of
Pernambuco, Brazilian Reference Centre on Biomass (CENBIO), Brazilian
Centre on Biofuels (CERBIO), National Centre of Hydroelectric Energy
(CENEH), Brazilian Centre on Thermosolar Development (Green Solar), the
Renewable Energy Development Centre (NACER) and the Alternative Energy
Development Group (GEDAE). Most of these groups are housed in national
universities [16]. National efforts for methane capture are being led by
CETESB (Companhia de Tecnologia e Saneamento Ambiental) for methane
from sewage and EMBRAPA (Empresa Brasileira de Pesquisa Agropecuária)
for avoided methane from non-flooded rice fields [13]. Also, a Federal and São
Paulo State Forum on Climate Change was formed to create a social conscience
about climate change and facilitate communication between the public and
private sectors. The NGO sector has been involved by creating the
Observatório do Clima, which will attempt to impact Brazilian climate change
negotiations and policy as well as promote CDM activities [17].
The Brazilian Mercantile Exchange (BM&F) Carbon Facility was created
by the Brazilian Ministry of Development, Industry and Foreign Trade. It
attempts to ‘foster the interest of Brazilian entrepreneurs in the development of
CDM projects by providing them with an efficient mechanism through which
they can publicize their projects, and by creating a facilitating online environ-
ment where carbon credit trades can be carried out in the future’ [18].
There is also a strong private sector initiative, especially within the landfill,
small hydro and sugarmill industries, to promote and develop CDM projects
[13]. Numerous conferences and seminars like the annual ‘Carbon Markets’ in
São Paulo are meant to accomplish these goals.
Carbon brokers
The private sector has taken a strong hold in Brazil, realizing its huge CDM
potential. A variety of consultants are active in the country and have local
offices. Some of the carbon brokers with offices in the country include
Ecosecurities, Econergy International, MGM International and C-Trade
Comercializadora de Carbono Ltda. A host of other carbon consultants are
interested in pursuing other projects there.

The renewable energy potential in Brazil is enormous. There are 9794MW of
developable hydro potential with 3936MW of this potential already primed for
development since Agência Nacional de Energía Eléctrica (ANEEL) has
granted permits for its use. The biomass potential within the sugarcane indus-
try is 3852MW, and 1772MW of this potential has been authorized for devel-
opment. The wind industry has 143GW of total potential and 30GW of
developable potential. Already, 6GW of wind farms have been given permits
for development [19].

Private sector power participants have been frustrated by the extensive require-
ments and process for national approval. Also, the office struggled to define an
approval process for a long time, which annoyed first-mover project develop-
ers. This type of environment is ripe for bribes and according to Christiana
Figueres’ assessment of DNAs in 2004, ‘Some private sector representatives
have resorted to political pressure to get their projects considered’ [13].
Another frustration for renewable energy project developers in Brazil until
May 2008 was the inability of Brazilian authorities to make a decision on how
to calculate the grid carbon intensity. The Brazilian grid is divided into four
distinct parts, each of which has a unique emission factor. The northern two
grids are more clean-burning while the southern grids rely more on fossil fuels.
In 2007–2008, Brazil proposed creating four separate emission factors for
renewable energy projects to use. Then, in May 2008, the DNA decided to use
one national grid emission factor. This decision will impact the number of
Certified Emission Reductions (CERs) that each project will earn, allowing
more for northern projects and less for southern projects. However, project
developers and carbon brokers are just glad that the emission factor will be
available, since they have been backlogged as developers waited until they
could calculate the emission factor for CDM registration [20].
Brazil’s PROINFA makes great strides towards promoting renewable
energy projects by guaranteeing capacity additions, but its local component
requirement has limited the amount of development that can occur. The only
local turbine manufacturer, Wobben Windpower (100 per cent owned by
German Enercon), has two domestic factories that make three models of
turbines and is so busy that it cannot keep up with the orders it receives [12].
IMPSA of Argentina is moving into the country with a factory in the Brazilian
state of Pernambuco that will be able to produce 200 1.5MW turbines per year
[21].
In addition to having difficulty sourcing local parts, wind developers had
difficulty acquiring environmental permits and land deeds by the original
PROINFA 2006 deadlines. For that reason, the deadline was extended to 2008
[1].
The constant revision of the PROINFA to have dates extended and MW
capacity requirements changed may make it lose validity and stringency in the
eyes of developers. It is a clear example of the trial-and-error energy policy
experimentation in the region.
One more complication from the PROINFA legislation is that it could
complicate the issue of regulatory additionality, which stipulates that the CDM
project was not required by law. Also, the financial incentive given through a
BRAZIL 175
feed-in tariff for these projects could prevent project developers from showing
that projects are financially additional.
Summary
Brazil has tremendous CDM potential because of its plentiful natural
resources, developed industries and constant demand growth. The private
sector, with little help from the DNA office, and a host of capacity building
institutions, has promoted CDM successfully. Brazil now dominates the region
with regard to emission reductions produced. Its recent PROINFA legislation
should continue to open the landscape for CDM projects as long as projects
can continue to prove additionality.
References
1 Porto, L. (2005) ‘Renewable energies in Brazil’, Ministry of Mines and Energy of
Brazil, Presentation, available at www.si3ea.gov.co/Si3ea/Documentos/ciure/
Documentos/Mexico/FNCE%20en%20Brasil.pdf
2 São João Hydro Power Plant (2007) São João Hydro Power Plant Project Design
Document, UNFCCC, 29 May
3 World Bank (2005) Benchmarking data of the Electricity Distribution Sector in
Latin America and the Caribbean 1995–2005, available from
4 World Bank (2007) ‘Latin America and the Caribbean Region (LCR): Energy
sector – retrospective review and challenges’, Energy Sector Management
Assistance Programme report, 15 June
5 Kingstone, P. (2004) ‘Critical issues in Brazil’s energy sector: The long (and uncer-
tain) march to energy privatization in Brazil’, The James A. Baker III Institute for
Public Policy of Rice University, Houston, TX
6 International Energy Agency (2006) World Energy Outlook, International Energy
Agency, Paris
7 Organisation for Economic Co-operation and Development (2005) ‘Regulation of
the Electricity Sector’, OECD Economic Survey of Brazil 2005, OECD, Paris
8 do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, presentation at Centro
Clima: Centre for Integrated Studies on Climate Change and the Environment,
available through Renewable Energy Policy Network for the 21st Century at
www.ren21.net/pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy%
20Policy%5B1%5D.ppt
9 Feitosa, E. A. and Carla, A. (2006) ‘Brazilian Wind Energy Programme: Status and
perspectives’, presentation at the Fifth World Wind Energy Conference, New
Delhi, 6–8 November
10 World Resources Institute (n.d.) ‘Brazil: Luz para todos’, available at
http://projects.wri.org/sd-pams-database/brazil/luz-para-todos, accessed on 10
March 2009
12 Lopes, E. (2008) Interview with E. Lopes, Project Development for Wobben
Windpower, 15 March

14 Lawrence Berkeley National Laboratory (n.d.) ‘Clean Development Mechanism’,
International Energy Studies, http://ies.lbl.gov/node/370, accessed 10 May 2008
15 Figueres, C. (2008) Interview with C. Figueres, Principal Climate Change Adviser
to ENDESA Internacional and Vice President of the Bureau of the UN Framework
Convention on Climate Change, 6 April
16 Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía
en America Latina y el Caribe: Situacion y propuestas de politica’, commissioned
by CEPAL and GTZ and prepared for the delegates of the Second World
Renewable Energy Forum in Bonn, Germany, 29–31May 2004, 19 May, available
at www.funtener.org/pdfs/Lcl2132e.pdf
17 Sales, R. and Sabbag, B. K. (2006) ‘Legal compliance with environmental
requirements impacting assessment and demonstration of additionality in Clean
Development Mechanisms: A legal review under the UNFCCC, the Kyoto Protocol
and the Brazilian Legal Framework on Climate Change’, report for Baker &
McKenzie’s Brazilian Environmental and Climate Change Practice Group, January
18 Rio de Janiero Stock Exchange, ‘Carbon Market: BM&F Carbon Facility’,
www.bvrj.com.br/mbre2/banco_projetos/conheca.asp, accessed 15 April 2008
19 General Electric (2006) ‘Renewables: The future of energy’, GE Energy Latin
America, 12 January presentation at Institute of the Americas Conference. Once
available at www.iamericas.org/pdfs/Presentations/Energy/
2006BrazilRenewableVideoConf/GERenewables.pdf – no longer available
20 Point Carbon (2008) ‘Brazil emissions measurement to “increase CER
Production”’, Carbon Market News, 13 May
21 Guiñazú, H. (2008) Interview with H. Guiñazú, Director of IMPSA, 13 March
14
Chile
Vital statistics
Portfolio mix: 33 per cent petroleum; 19 per cent natural gas; 10 per cent coal;
18 per cent hydro; 14 per cent biomass [1]
Average price of electricity: 10.9¢/kWh residential; 8¢/kWh industrial
Capacity payment: yes, based on theoretical margin of reserve [3]
Market manager: Centros de Despacho Económico de Carga (CDEC)
Regulator: Superintendencia de Electricidad y Combustible (SEC)
Policy maker: Comisión Nacional de Energía (CNE)
Environmental permits: Comisión Nacional del Medio Ambiente (CONAMA)
Rural electrification: Committee within CNE

Chile was a leader in electrical sector privatization for the region. The 1982
Electrical Act returned the state-owned companies, which were made public
during President Salvador Allende’s term from 1970 to 1973, back to their
private owners. Allende’s experiment with making these companies public led
to inflation, high fuel prices and price controls. The reprivatization of the
sector involved splitting up the large state-owned company, Endesa, into 14
different generation and distribution companies. This restructuring was a
success and led to strong free market participation in new capacity additions
from 1990 to 1998 [4]. Generators can participate in the spot market, Power
Purchase Agreements (PPAs), or accept node prices based on the average cost
of generation at the distinct node site in the grid where the generation is
inserted [5]. Also, generation dispatch in Chile is based on a merit order
dispatch whereby the least-cost generators are selected first until demand is met
by an independent authority known as the Economic Dispatch Centres
(Centros de Despacho Económico de Carga (CDEC)) [6].
Restructuring worked well until 1998 when a severe drought caused by La
Niña drew the country’s attention to its 57 per cent dependency on hydro
generation [7]. Reservoirs were not able to supply the needed electricity and
blackouts and rationing ensued. Generators in PPAs could not supply the
promised generation. This situation, along with low prices for node-point
connections and an average demand growth of 4.6 per cent each year since
1990, led to a lack of capacity installation from 1998 to 2004 [8 and 9]. To
reduce Chile’s dependence on hydro resources, those new applications that
were built in the late 1990s were natural gas plants, which could be operated
fairly cheaply with gas from Argentina.
Another disruption in the Chilean electrical sector occurred in 2002 when
the Argentine gas supply was reduced. This supply cut happened for two
reasons. Firstly, the Argentine peso devaluation led to a halt in new gas explo-
ration, so Argentina began rationing its gas for domestic use. Secondly, the
Argentine gas contracts were fixed to the dollar, which made the international
contracts suddenly worth one-third as much after the devaluation [10].
Therefore, Argentine gas suppliers could get more for their product if it was
sold domestically.
In response to this shortage, Chile began switching its natural gas power
plants to accept fuel oil and has begun construction on a regasification facility
on the coast to receive liquefied natural gas from other countries. In November
2007, only 1 per cent of the gas/petroleum plants, which make up 30 per cent
of Chile’s overall generation, were burning natural gas. Bolivia has also been
reluctant to sell to Chile as it hopes to secure a Pacific port on the border
between Peru and Chile in exchange for sales of natural gas [10].
Because Chile has few hydrocarbon reserves, with just 150 million barrels
of oil and 3.5 trillion cubic feet (tcf) of gas [4], the recent high international
prices of petroleum have caused the spot price for electricity in Chile to surge
from $40/MWh in April 2004 to $100/MWh in November 2007 and
$250/MWh in March 2008 in the central transmission region that serves
Santiago. High oil prices, together with a summer drought in 2008 that left
hydro reservoirs empty, caused this situation. Rationing is expected for 2008
and 2009 until major projects are added in 2010. The dire need for new
capacity guarantees high prices for new generation sources [10].
This recent change in fuel mix from natural gas to petroleum has had
implications on Chile’s emission factor, making it higher and allowing Clean
Development Mechanism (CDM) projects to earn more reductions [8]. Also,
some CDM projects that involved switching petroleum-burning plants to
accept natural gas have lost their CDM potential as they have had to be recon-
verted back to accept a liquid fuel with a higher carbon intensity [10].
CHILE 179

In response to these electrical supply disruptions, the country passed two laws
to promote new renewable energy capacity additions that will not be suscepti-
ble to droughts or foreign supply lines. In 2004, Short Law I (Ley 19,940) was
passed to help better promote renewable energy less than 20MW. This law
provided exemption from transmission and distribution charges for projects
under 9MW. Generators between 9 and 20MW pay increasing charges for
transmission and distribution that are based on the system’s size. This law also
provides guaranteed access to the grid, and the ability for generators to sell in
the spot market [11].
In 2005 Short Law II (Ley 19,657) was passed to require distributors
serving residential customers to source 5 per cent of their energy from renew-
able energy sources, which includes hydro under 20MW, by the year 2010. In
order to make Chile less susceptible to drought, only dams under 20MW are
eligible to fulfil this 5 per cent mandate [12]. These smaller dams can spread
out the impact of drought, which may hit different regions of the country.
Currently, 2.6 per cent of Chile’s capacity comes from 327MW of qualifying
resources [9]. The Short Law II will require 200MW of new capacity additions
by 2010 and 1400MW by 2020 [13]. The extra cost burden of this renewable
generation will be averaged throughout the country to ensure that it does not
disproportionately affect regions with poor renewable energy resources. The
penalty for not complying with the mandate is $27/MWh or $40/MWh after a
distributor has failed three years in a row to complete the requirement [13].
A third renewable energy law, referred to as Short Law III (Law 20,257), was
passed by Congress in March 2008 and requires both generators and distributors
to continue to comply with Short Law II and source 10 per cent of their energy
from renewable energy sources by 2024 [14]. There is also a proposal by the
current president, Michele Bachelet, to have 15 per cent of the growth in energy
generation capacity coming from renewable sources by 2010 [15].
As previously mentioned, generators currently have the option to sell
within a PPA or the spot market, or accept the node price at the closest connec-
tion point to the grid. This node price is determined by a formula that takes
into account future fuel price forecasts. However, Short Law I eliminates the
node price option since in recent years it was set too low and stifled new
capacity additions [8]. Therefore, the penalty that generators who do not
source 5 per cent of their energy from renewable sources by 2010 and 10 per
cent by 2024 will have to pay should translate into higher prices, negotiated
through PPAs, for renewable generators. If Short Law III is passed, the price for
renewable generation may increase even more as generators with contracts
with large consumers will be held responsible for fulfilling the mandate.
Penalties, instead of incentives like production tax credits or feed-in tariffs,
were chosen to promote these renewable energy laws because of Chile’s strong
neoliberal tendencies. The hope was that the penalties would push the market
to provide the cheapest generation with minimal subsidies.
CDM portfolio
16
14
12
Number of projects
10
0
methane methane
capture capture
Figure 14.1 Projects registered or in validation in Chile
Chile is very advanced with regard to its landfill development because it is an

industrialized country with population centres served by several lined landfills
that lend themselves well to methane capture. Also, the biomass sector is devel-
oped because of the production of energy from wood and wood scraps at
lumber mills in the Lake District and Patagonia. The hydro sector is developed
because this is an area that generators in the country were familiar with prior
to CDM and now are taking advantage of additional revenues for this genera-
tion. These projects may have difficulty proving additionality in the future
because of their prevalence.
With regard to wind, Chile is underdeveloped given its potential and stable
investment climate. Endesa has led the way for large wind development in
Chile with their 18MW ‘Canela’ wind farm that is under construction with
Vestas 1.65MW turbines in Region IV. Other large companies like Pacific
Hydro are monitoring two sites for the possibility of putting in farms, but were
waiting during the autumn of 2007 to see if Short Law III passed before invest-
ing heavily in wind in the region. For now, the growing demand necessity and
Chile’s experience with hydro make this the most attractive option. Colbún,
Chile’s second largest generator, is also putting its efforts into more hydro with
six projects that will total 500MW and coal-burning generation with a
700MW plant.
A local bottle-making company, Cristalería Toro of Chile, is ‘greening’ its
image by installing 3.45MW of capacity on the coast of Chile in Region VIII.
Cristalería Toro also hopes to install 8.65MW more for a total of 12MW in the
second stage of the project. Cristalería Toro has already benefited from
CORFO funds for a feasibility study, purchased turbines, and hoped to install
the first stage of the project in January of 2008. For this small project, turbines
CHILE 181
were difficult to source; two used turbines of 600kW from Germany and two
new 780kW turbines from Chinese manufacturer ZheJaing Huayi Wind
Energy Development will be used. These turbines were selected based on their
low cost and immediate availability [16].

DNA office
Chile’s governmental environmental office, Comisión Nacional del Medio
Ambiente (CONAMA), is well organized, but the Designated National
Authority (DNA) portion of this office is not very developed. Perhaps due to a
lack of resources, the office has a basic webpage with a dearth of information,
and the author was not able to meet with the DNA or anyone related to the
topic of climate change while in the country for ten days [17]. The lack of
resources allocated to this office seems inconsistent with the recent interest in
renewable energy of the federal government, and efforts may soon be
bolstered. The office claims to help project developers determine baselines,
decide which CDM methodologies to use, and offer international seminars on
CDM. The DNA office requires that the project be environmentally additional
and that the programme participant be voluntary for national approval. This
second criterion of voluntary participation may prevent projects that qualify
for the country’s renewable mandate from earning national approval. No
CDM projects have yet attempted to qualify for both.

The incentives of Short Laws I, II and III have made investors take note of
Chile’s excellent estimated potential for renewables, with 600MW for mini-
hydro, 10,000MW for wind [9], 4000MW for geothermal and 300MW for
biomass development [18]. Chile’s Atacama Desert and areas in the Andes are
known for their excellent solar resources, but few studies have been done to
quantify the potential there. The Foundation for Technology Transfer and the
Universidad de Chile completed a wind energy potential study, but it only
covers Regions III–V (of Chile’s 15 regions) [19].
Other domestic institutional support and barriers

The Climate Protection Programme of German GTZ (Deutsche Gesellschaft
für Technische Zusammenarbeit) prepared a National Strategy Study for the
CDM in Chile in March of 2003. This study pointed out that the strong
economy and many opportunities in the energy and forestry sectors make the
country ripe for CDM development [20].
The Chilean Economic Development Agency (CORFO) has offered
funding for feasibility studies and Project Design Document (PDD) support for
wind, biomass, geothermal and hydro small-scale under 20MW. Thus far, 57
hydro, 64 wind, 24 biomass and 6 geothermal projects have gained CORFO
financing for feasibility studies. These 151 projects are a significant effort to
promote renewable development in the country [21]. The funding for these
projects stems from a Memorandum of Understanding in 2005 that CORFO
and the National Energy Commission (CNE) signed in order to facilitate the
promotion of non-conventional renewable energy via partial funding of feasi-
bility studies for small-scale renewable energy through grants for
pre-investment studies and specialized financial support [21].
The amount of the grant for feasibility studies, which applies to invest-
ments between $400,000 and $2 million, is up to 50 per cent of the cost and 2
per cent of the estimated investment, with a maximum of 5 million Chilean
pesos per company (around $10,000). For investments over $2 million, the
grant has a maximum of $60,000 or up to 50 per cent of the costs, per
company. After three calls for projects, CORFO is allocating $4.5 billion to
feasibility studies. A total of 800MW and $1.7 billion of funds would be
invested if all of the feasibility studies led to projects. Also, CORFO is offering
soft loans, developer/investor matchmaking sessions, and equity funds to
support renewable energy development in Chile [22].
CORFO’s grants for feasibility studies could help distributors meet the 10
per cent renewable energy mandate by 2024 by stimulating the development of
new renewable energy sources. Both domestic and international companies are
encouraged to apply for funds. CORFO also hopes to promote rural off-grid
systems with these funds, but as of November 2007, none have applied. A
diverse group of generators from large companies to small start-ups have
received and applied for funds [21].
The PDD component of this funding is offered jointly by CORFO and
Todochile, which also attracts foreign investment to the country. Selected
projects would get up to 50 per cent of the PDD costs (maximum of $12,500)
covered for hydro, biomass, solar and geothermal projects under 20MW [23].
This opportunity has tremendous potential to support small-scale CDM
projects, but this portion of the CORFO funding has not been widely adver-
tised and could face informational barriers to being utilized.
Carbon brokers
Despite Chile’s relatively long project list and potential for more development,
there is not one carbon broker that has dominated the market for CDM project
cycle work. Many of the current projects have developed their own PDDs.
Also, the World Bank was involved in two hydro projects. Ecosecurities has
one hydro and one landfill gas project in the country. Deuman is a local firm
that has partnered to work on the PDDs and Project Idea Notes (PINs) for
several prospective Chilean projects. None of the big market competitors such
as MGM International, Ecoinvest, Ecosecurities or Econergy have offices in the
capital, though. As a result, Chile may be a market ripe for carbon consultants.
The head of the small-scale renewable energy division of Colbún, Chile’s
second largest generator, admitted that he had not been approached by anyone
to help with the CDM development of planned projects [8].
CHILE 183

Despite the CORFO initiative and the other advantages for project develop-
ment in Chile, there are a few pitfalls to development there. For large hydro
developers, there is huge social and environmental resistance to dams like
Endesa and Colbún’s proposed 2750MW dam in Aysen. Many of these large
dams are being sited in picturesque areas of the Lake District and Patagonia
where tourism and ecosystems would be affected [24]. Also, hydro above
20MW now requires an extra process of approval and World Commission on
Dams guidelines to be utilized in the EU Trading Scheme. Just getting the water
rights for a hydro project can also be problematic as the current water law in
Chile allows a bidding war to determine the price developers pay [25].
Another complicating factor in Chile is that the country has four transmis-
sion grids that are separate and have distinct generation mixes. Therefore, if
there are excellent renewable resources in the south of the country such as
wind or hydro potential in Patagonia, there is no way to get electricity from
these resources to where it is most needed – the Central Interconnected System,
where Santiago and the port city of Valparaíso are located. Also, each of these
grids has a unique generation mix, which will affect the number of Certified
Emission Reductions (CERs) a project can expect in each region. For example,
a project developer could expect a high number of CERs if developing a project
in the northernmost grid since that is almost purely served by thermal
resources. For this reason, using Chile’s average grid emission factor to calcu-
late expected CERs is not particularly useful [26].
Chilean developers were dissatisfied with the number of CERs that they
were able to glean from creating projects in the Central Interconnected System,
which is served by 53 per cent hydro capacity [27]. Therefore, developers of a
hydro plant called Chacabuquito formulated a new methodology (Approved
Methodology (AM) 0026) for Chile that would take into account how Chile
uses the water in its dams and provide more CERs. The preferred grid-
connected renewable energy CDM methodology to calculate the operating
margin of the baseline formula for finding emission reductions requires devel-
opers to look at the last 10 per cent of generation dispatched on the system.
Then the CERs are calculated based on the emission factor of this last 10 per
cent of generation.
In Chile, shadow pricing is used to value the water in dams. And the
dispatchable nature of the water in a dam maintains a high price for the value
of the water that causes other, cheaper sources of electricity to be utilized first.
After the drought of 1998, the price of this water increased to the point where
the hydroelectric plants were almost always dispatched last since the value of
the water is so high. Therefore, few CERs were calculated in Chile since the last
10 per cent dispatched almost always came from hydroelectric, an emission-
free source [28]. Chacabuquito developers proposed a new methodology to the
UNFCCC CDM Executive Board for calculating an operating margin baseline
in Chile and other countries with a merit order dispatch [29]. The proposed
methodology (New Methodology 0076) was not accepted as written, but
changed and, according to those proposing the methodology, failed to capture

the real functioning of a merit order dispatch system and its implications for
creation of an operating margin emission factor [6]. (More details about AM
0026 can be found in Chapter 7, ‘UNFCCC Procedural and Methodological
Barriers’.)
Summary
The electricity supply crisis, new renewable energy legislation, CORFO initia-
tive and safe investment climate of Chile make it an ideal place for project
developers. The natural gas supply shortage from Argentina and recent domes-
tic droughts have prompted aggressive renewable energy legislation that
promotes small hydro and other renewable sources of energy. However, the
large hydro portion of the nation’s portfolio mix and project developers’ inabil-
ity to get an advantageous Chilean-specific exact proposed methodology
passed limits the number of CERs that can be generated per project. Social and
environmental problems with large dams and the four different disconnected
transmission grids further limit renewable potential.
References
1 Comisión Nacional de Energía de Chile (2004) Balance de Energía 2004:
Consumo de Energías Primaria/Total País,
www.cne.cl/fuentes_energeticas/f_primarias.html, accessed 15 March 2008
2 UNFCCC (2007) MGM International, La Cascada 2.3MW Hydroelectric Project
Project Design Document, 10 January
3 Watts, D. and Ariztía, R. (2002) ‘The electricity crises of California, Brazil and
Chile: Lessons to the Chilean market’, paper presented at Large Engineering
Systems Conference on Power Engineering, Halifax, Nova Scotia, Canada, 26–28
June
4 Center for Energy Economics (2006) ‘Results of electricity sector restructuring in
Chile’, Jackson School of Geosciences, University of Texas at Austin, 26 March,
www.beg.utexas.edu/energyecon/new-era/case_studies/Results_of_Electricity_
Sector_Restructuring_in_Chile.pdf, accessed 3 March 2008
5 Millán, J. (1999) ‘The electrical sector in: Chile’, in Profiles of Power Sector
when a CDM project displaces a reservoir hydro power plant’, report, 25 July,
available at http://cdm.unfccc.int/UserManagement/FileStorage/
D721E2UMVYQ4OHIDJOA6Y0EPMKJS7X
8 Morales, C. (2007) Interview with C. Morales, Gerente de Proyectos Especiales de
Colbún, 19 November, Santiago, Chile
9 Tokman, M. (2007) ‘Situación actual y política energética ERNC’, presentation at
CORFO Chile Invest forum, 16 November, Santiago, Chile
CHILE 185
10 Frias, C. A. (2007) Interview with C. A. Frias, Especialista Area Ingenieria, 18

la Ley General de Servicios Eléctricos, 13 March, Diario Oficial de la Republica de
Chile
12 Ministerio de Economía Fomento y Reconstrucción (2005) Ley Corto II: Modifica
el Marco Regulatorio del Sector Eléctrico, 19 May, Diario Oficial de la Republica
de Chile
13 Iglesias, R. (2007) ‘Proyecto de ley para el desarrollo de las energías renovables no
convencionales’, presentation at CORFO Invest Chile Conference, 16 November,
Santiago, Chile
14 Ministerio de Economía Fomento y Reconstrucción de Chile (2008) Ley Nº
20.257, Comisión Nacional de Energía de Chile, 1 April, Diario Oficial de la
Republica de Chile
15 Australian Embassy in Chile (2007) ‘Opportunities in renewable energy’
www.chile.embassy.gov.au/sclecastellano/Hola1art2E.html, accessed 15 May 2008
16 Faundez, P. (2007) Interview with P. Faundez, Engineer for Ecoingenieros, 14
17 CONAMA (n.d.) Cambio Climático, www.conama.cl/especiales/1305/
propertyvalue-14612.html, accessed February 2008
18 Programa Chile Sustentable (2006) ‘Desarrollo energético sustentable: Impacto de
los Patrones Energéticos y Opciones Alternativas’, presentation at Seminario
Internacional Seguridad Energética: America Latina: Reflejo de las contradicciones
de la globalización, 21–22 June, Santiago, Chile
19 Muñoz, R., Garreaud, R.,Gallardo, L., Cabello, A. and Rosenbluth, B. (2003)
‘Mejoría del conocimiento del recurso eólico en el norte y centro del país’,
Fundación para la Transferencia Tecnológica and Departamento de Geofísica de la
Universidad de Chile, report for Comisión Nacional de Energía
20 Sanhueza, E., Maldonado, P. and Neuenschwander, A. (2003) National Strategy
Study for the CDM in Chile, Climate Protection Programme, Deutsche
Gesellschaft für Technische Zusammenarbeit (GTZ), Eschborn, Germany
21 Garcia, J. (2008) Interview with J. Garcia, CORFO Renewable Energy Projects,
Chilean Economic Development Agency, 5 January
22 Chilean Economic Development Agency (2007) ‘Project’s Directory for Renewables
and CDM in Chile: Investment opportunities and project financing’, paper prepared
for CORFO Invest Chile Conference, 16 November, Santiago, Chile
23 CORFO (2007) ‘Programa de preinversión en energías renovables no
convencionales (ERNC)’ in Guía de Instrumentos de Fomento Productivo de la
Región Metropolitana 2008, written by the Government of the Metropolitan
Region, 1st Edition, April 2008
24 Fromin, L. (2007) ‘Ecologistas iran tras los accionistas de Transelec en Canada’,
La Tercera, 18 November, Santiago, Chile
25 Weisner, R. (2007) ‘Water rights and hydro run-of-river projects’, presentation at
CORFO Invest Chile Conference, 17 November, Santiago, Chile
26 Sanhueza, E. (2007) Interview with E. Sanhueza, Consultant for CEPAL on
Renewable Energy, 12 November, Santiago, Chile
27 Comision Nacional de Energía de Chile (2007) ‘Capacidad Instalada de
Generación de SIC’, July, www.cne.cl/estadisticas/anuario/electricidad/php_electri-
cidad-01.php, accessed 20 March 2008
28 Garcia, J. (2007) Interview with J. Garcia, CORFO Renewables Coordinator, 16

29 Manuel, J. (2007) Interview with J. Manuel, Hydromaule Project Developer, 16
15
Colombia
Vital statistics
Portfolio mix (by installed capacity): 64 per cent hydro; 27 per cent gas; 5 per
cent coal; 0.1 per cent wind; 3.4 per cent other [1]
Average price of electricity: 9.8¢/kWh (residential and commercial) [3]
Capacity payment: $5.25/kW [4]
Market manager: Centro Nacional de Despacho (CND)
Regulator: Comisión Regulatoria de Energía y Gas (CREG)
Policy maker: Ministerio de Energía y Minas
Future planning: Unidad de Pleanación Minerio Energética (UPME)
Environmental permits: Ministerio del Medio Ambiente Vivienda, y Desarrollo
Territorial
Rural electrification: Instituto de Planificación y Promoción de Soluciones
Energéticas (IPSE)

The Colombian electrical sector began to fail in the late 1980s when the state-
run Colombian electrical company could not provide sufficient capacity due to
cost overruns and subsidized tariffs [5]. Large new projects were delayed, and
in 1992 a La Niña event caused a drought that led to shortages all over the
country [6]. The upshot of this crisis was twofold; it created an emergency
Power Purchase Agreement (PPA) signing time when PPAs were signed by
distributors for generation at unfavourable terms, and it led to Colombia
privatizing the electricity sector with the Law of Public Services (142) and the
Electricity Law (143) in 1994 [7].
Prior to privatization, ISA (Interconneción Eléctrica SA) did all generation

and transmission. The laws of 1994 prevented vertically integrated companies
and ISA broke into ISAGEN for generation and ISA for transmission. ISA is
now the largest transmitter throughout the Andean region, but within
Colombia, any company can enter the transmission business. A few state-run
companies, like Empresas Públicas de Medellín which controls about 15 per
cent of the generation and distribution markets, are still vertically integrated,
but hold separate accounts for the two market sectors [8]. No single generator
or distributor can control more than 25 per cent of the market. In 2003, the
private sector owned 56 per cent of generation and 47.5 per cent of distribu-
tion [9]. Generators earn a fixed capacity charge as well as energy payments
and compete for new capacity additions through a least-cost bid process [10
and 11].
Generators in Colombia receive payments based on the prices settled in a
bidding process. The generators offer a price for their generation that may not
depend on the cost of producing the energy. The Colombian market manager
(Centro Nacional de Despacho) then decides on dispatch according to the
merit order and takes into account system limitations. This model was adopted
from the UK, but all other power markets in South America are cost-based,
where generators offer their energy based on how much it costs to produce it.
Then, the least-cost generation is selected first and the price that all generators
receive is set by the cost of the last generation that enters the system. The
Colombian model is meant to stimulate more market participation, but
depends on the market being full of many generators and not dominated by a
few who could collude on prices offered [4].
For all users that require less than 0.5MW of power, the regulatory agency
(Comisión Regulatoria de Energía y Gas) controls tariffs. A cross-subsidy
between members of the top three most affluent groups of people applies to the
bottom three groups, allowing about 25 per cent of the electricity bills of low-
income customers to be paid by the more affluent groups. A portion of the
tariff is reserved for covering unexpected grid losses due to guerrilla activity
that cuts supply to a line. Large power consumers can directly negotiate their
power prices with distributors or generators [12].
Colombia is interconnected with Ecuador to the south, supplying on
average 10 per cent of Ecuador’s electricity. Colombia is also interconnected
with Venezuela and handles its Andean transactions through the Andean
Electric Market (Mercado Eléctrico Andino) [4]. And the Puebla Panama Plan
proposes interconnecting Panama and Colombia with a line that could carry
300MW from Colombia to Panama and 200MW in the reverse direction [13].

In order to help promote investment in new capacity additions for renewable
technologies, the government passed Law 697 in 2001. Decree 3683 of 2002
spelled out the exact incentives and benefits that this Law 697 provided. In
COLOMBIA 189
short, it allows renewable generators to be exempt from paying tax on impor-

tations and if a project is a ‘first-of-its kind’, it can exempt taxes on salaries,
research equipment and all other project costs [14 and 7]. More recently, in
2007, an income tax waiver for 15 years applies to generation projects that
give 50 per cent of their CERs to the sustainable development of the commu-
nity where the project is located. Sustainable development is defined by the
Designated National Authority (DNA) office and is based on various
economic, political and social criteria [15].
CDM portfolio
7
5
Number of projects
0
methane methane
capture capture
Figure 15.1 Projects registered or in validation in Colombia
The Clean Development Mechanism (CDM) movement was started mainly by

the Public Utility of Medellín (Empresas Públicas Medellín (EPM)) with a
19.5MW wind project and a hydro project. There are plans for several large
hydro applications including Calderas (26MW), Transvase Guarinó, Amoyá
River (80MW), Manso (27MW), Porce III (660MW) and Quimbo (400MW)
[16]. How many of these projects will be able to earn CDM credit is uncertain
since hydro power is a common energy application in the country.
There is an interesting effort in Colombia to aggregate 32 palm producers
under the industry association of Fedepalma to create Certified Emission
Reductions (CERs) through methane capture from the wastewater of the palm
oil process.

DNA office
Colombia’s DNA office is not one of the strongest in the region because of its
designation as temporary. Unlike Peru, Ecuador and Chile, it has not been
divided into promotion and regulatory arms. The office resides in the Ministry
of Environment, but does not have permanent status. The direction of the
office sways depending on the priorities set by the staff in the ministry, who
tend to change with each presidential election. Therefore, its workers are
temporary as they often work on a contract basis. While staffed with eager,
young people in the autumn of 2007, it cannot attract many experienced folks
in the field because of the low pay that the government offers in comparison to
the private sector. The staff is divided into carbon reduction potential
categories and assesses barriers to development in each sector. The office has
considered taxing CERs from projects in order to provide better capacity devel-
opment, but is wary of stifling project development. Currently, the office
responds to requests for informative lectures, but does not market CDM
opportunities. Also, the office is in the process of restructuring its website to
make it more accessible for project developers [17].
Critics of the office say that it has taken up to seven months to process a
request for national approval. According to Resolution 0453 of 2004, a
request should take only 45 days to process [18]. But carbon brokers have
experienced delays since the approval process must first pass science, then
planning, and finally, climate change committees. All committees must be in
agreement to allow the project to pass. Usually more information is requested
in order to exempt the committee from the time constraint. Developers claim
that the DNA office is considering technical, legal and environmental analyses
of the project when this is not within the scope of their work [19].

Colombia has several institutional support networks with studies and initia-
tives from a broad variety of sectors. The National Strategic Study for CDM
Implementation in Colombia of 1999–2000 was supported by the government
of Switzerland and the World Bank’s National Strategic Studies (NSS)
Programme and estimated the emission reduction potential at 22.9 million
tonnes of CO2 per year from the electric power, cement, sugarcane and agro-
forestry sectors. The study also determined how to maximize the potential
benefits of the CDM in Colombia. The Hydrology, Meteorology and
Environmental Research Institute (Instituto de Hidrología, Meteorología y
Estudios Ambientales (IDEAM)) with funding from the Global Environment
Fund (GEF) is planning to put together a plan to catalogue the country’s
anthropogenic greenhouse gases emissions. The Colombian Ministry of the
Environment and Canadian Research Institute created a marketing tool for
CDM promotion in 2001. GEF is funding an effort in the Ministry of the
Environment, Housing and Territorial Development to develop improved
capacity development for CDM. The country’s National Development Plan for
2002–2006 incorporated CDM as it set a goal of earning of $30 million from
Emission Reduction Purchase Agreements (ERPAs) for eight projects. The
National Environment Council formulated a plan to mitigate climate change
threats; part of the council’s strategy is promotion of CDM projects. The Social
COLOMBIA 191
and Economic Policy Council (Consejo de Política Económica y Social

(CONPES)) set projects that reduced greenhouse gas emissions as a national
goal in 2003 and provided specific provisions to achieve this goal [20].
The country has some permanent capacity building institutions for CDM
like the UPME (Unidad de Pleanación Minerio Enérgetica), which has devel-
oped a simplified small-scale baseline to stimulate project development of
projects that are 15MW or less. UPME also has plans for creating solar, hydro,
biomass, ocean and geothermal atlases of the country. In 2006, UPME
completed a detailed wind atlas for the country [21]. It also plans on identify-
ing, characterizing, giving priority to and disseminating the emission reduction
opportunities in the sector, aiming at promoting and facilitating the prepara-
tion and execution of CDM eligible projects [20]. Also, the University of
Antioquia is working on developing the Project Design Document (PDD) for a
landfill gas capture project near Medellín. However, these efforts tend to be
disparate and poorly connected or communicated [22].
A study by the World Bank’s Energy Sector Management Assistance
Programme (ESMAP) showed that the country’s wind potential alone could
cover the current domestic electrical needs [16]. And Empresas Públicas de
Medellín paved the way for developers by modifying the country’s existing
hydro permit process to apply to wind projects. As a result, ISAGEN and two
other companies have expressed interest in developing wind in the country, but
have not taken aggressive steps to pursue this wind potential [23].
The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) has
broken the mould of the typical state-run utility that is hesitant to involve itself
in CDM projects. It has pursued three CDM projects, and successfully regis-
tered the first wind project in the country and a small-scale hydro. It is also
pursuing several more CDM projects that would involve methane capture from
wastewater treatment plants that they operate. The current laws promoting
renewable energy allowed EPM to receive close to $20 million in tax exemp-
tions for the 19.5MW wind farm it developed in the region of La Guajira.
Carbon revenues from this project, even with the low price of under $5 per
CER offered by the World Bank, will total about $2.8 million during the first
15 years of operation [24]. This state initiative should help less experienced
developers with fewer resources follow suit [25].
Carbon brokers
Colombia has additional opportunities for project capacity building as it is
home to CAEMA (Centro Andino para la Economía en el Medio Ambiente),
which is a carbon consultant that strives to act on the side of project developers
to provide fair market price for CERs by keeping them informed of carbon
market updates [26]. Another global leader in carbon consulting, MGM
International, has a strong presence in the country with an office in Medellín.
Colombia is home to a national Designated Operational Entity (DOE) called
Instituto Colombiano de Normas Técnicas y Certificación (ICONTEC), which
can be contracted for less than international DOEs.

There is interesting potential in the areas of biomass and geothermal develop-
ment. The aforementioned ESMAP survey also found that there are over
16,000MWh of unused energy potential in biomass crops and agricultural
residues [16]. This ESMAP survey found several areas of interest with high
potential for geothermal resources and, in December 2007, ISAGEN began
requesting proposals for geothermal prospecting in the country after it received
a US Trade and Development Agency grant for $500,000 [27]. The country has
an average solar resource of 4.5kWh/m2 per day, but some areas like the
Guajira Peninsula boast 6kWh/m2 per day of radiation [16]. The Guajira
Department is also rich in wind resources, with average wind speeds between 5
and 11 metres per second throughout the year [21]. All together, there are
21GW of estimated installed capacity just in this department. The Andes create
an ideal environment for hydro potential. Large hydro potential is now at
93GW and small hydro at 25GW of installed capacity [16].

Overall, the investment climate in Colombia has improved significantly in the
last four years under President Álvaro Uribe’s leadership. However, investors
may still be wary of investing in a country with such a tumultuous past, and
with present guerrilla warfare due to cocaine production. Also, the somewhat
inexpensive electricity at an average of 9.7¢/kWh is a deterrent to independent
power producers (IPPs) and provides few opportunities of high internal rates of
return on generation projects in a country with such high perceived risk. Large
hydro projects with capital costs that have been paid and low operating costs
account for 64 per cent of the country’s generation capacity and are the cause
of this relatively cheap electricity [17].
The guerilla groups of Colombia occasionally interrupt the electrical sector
of the country by stealing substation parts or disabling generation stations.
This activity impacts the placement of renewable energy power stations.
Sometimes thermal generation is needed where it would not otherwise be sited
because it can provide grid support during disruptions to the system [12].
Excellent renewable energy sources in the mountains are sometimes in areas
that are unsafe for travel or would be susceptible to attack. Empresas Públicas
de Medellín was interested in developing hydro sites that were found to be
undesirable because of their proximity to guerilla groups [11].
Because of these power disruptions, syncing systems with the national grid
could prove challenging since the average number of outages per customer in
2005 was 185.7 and totalled 66 hours, which is far above the regional average
of 13 interruptions and 14 hours per year without electricity [3].
The country’s tariff calculation for energy payments to generators has been
changed a few times and was unclear for some project developers [28]. Because
of the large hydro component in the Colombian grid, the country’s grid
emission factor is fairly low at just 0.358 tonnes of CO2/MWh, even with the
Simple Adjusted Operating Margin baseline methodology that is designed
COLOMBIA 193
especially for countries like Colombia with 50 per cent of their grid run by
least-cost, must-run resources like hydro [2].
Colombia’s dispatch rules can either help or hurt generators depending on
their size. Low operating cost, must-run resources like wind that are under
20MW receive automatic dispatch onto the grid. This rule explains why the
size of 19.5MW was chosen for Jepirachi, the country’s only wind farm [29].
Systems under 10MW must sell directly to the distributor, who is not obligated
to buy the electricity. In this system, small generators can get a maximum of the
spot price and the distributor can go as low as possible for the price in the
negotiations. This huge disincentive for small systems has stifled development
in this area [12].
Colombia’s experience with developing landfill gas projects is varied due to
a social problem of scavengers who live on the sites in some areas of the
country. Private landfill operator Interaseo is successfully bundling four small
landfills in one PDD with CAEMA [30]. MGM, however, found that
scavengers on a landfill in Barranquilla prevented the project from going
through [19]. The local environmental authority told project developers that
the Barranquilla project could not go through unless the firm provided an
alternative income stream for the trash sorters. MGM has proposed using a
portion of the CERs derived from the project to build a formal recycling centre
for the landfill where the people would work. Interaseo, on the other hand, is
not providing any community benefits as they cite Decree 1713 of 2002 to
show that scavenging of trash at landfills and dumps is unlawful [31].
Summary
A relatively low emission factor and price of electricity, combined with fear of
operating in guerrilla warfare territory, has discouraged project development in
Columbia. However, if the recent economic growth and political stability
continue, and carbon brokers maintain a presence in the country, it will most
likely be an area of CDM project growth.
References
1 Ministerio de Minas y Energía and Unidad de Planeación Minero Energética
(UPME) and Colombia Minera, Sistema de Información Minero Colombiano,
Boletin Estadistico de Minas y Energia 2002–2007, available at
www.simco.gov.co/Portals/0/archivos/Boletin%20estadistico.pdf
2 UNFCCC (2007) MGM International, La Cascada 2.3MW Hydroelectric Project
Project Design Document, 10 January
5 Portal XM (2009) ‘Descripción del Sistema Eléctrico Colombiano’, Información

operativa y comercial, available from www.xm.com.co/Pages/Descripciondel
SistemaElectricoColombiano.aspx, accessed on 10 March 2009
6 Pombo, C. (2001) ‘Regulatory reform in Colombia’s electric utilities’, The
Quarterly Review of Economics and Finance, vol 41, no 5, pp683–711
7 Cardonas, A. (2007) Interview with A. Cardonas, Administrator Ministerio de
Energía y Minas, 10 October, Bogota, Colombia
8 Millán, J. (1999) ‘The power sector in: Colombia’, in Profiles of Power Sector
9 Millán, J. and Ayala, U. (2003) ‘Colombia: Coping with reform crisis’, in J. Millán
and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector Reform in
Latin America, Inter-American Development Bank, Washington, DC
10 Harvey, C. R. (2002) ‘Endesa Chile’, unpublished case document for students,
Fuqua School of Business, Duke University, Durham, NC
11 Garizábal, C. (2007) Interview with C. Garizábal, Departamento de Planificación
12 Soto, G. C. (2007) Interview with G. C. Soto, Administrator for Comision
Regulatoria de Energía y Gas, 10 October, Bogota, Colombia
13 Plan Puebla Panana (n.d.) Initiative Mesoamericana Energetica, available from
www.planpuebla-panama.org/proyectos.php?iniciativa=5&componente=0&
pagina=4&estado=nada&proyecto=42, accessed 25 May 2007
14 Unidad de Planeación Minerio Energética (2003) Decreto No 3683, 19 December
15 Ministerio del Interior y Justicia (2003) Decreto 2755, 30 September, Diario
Oficial 45,326
16 Vargara, W. (2007) Review of Policy Framework for Increased Reliance on
Renewable Energy in Colombia, World Bank Energy Sector Management
Assistance Programme, project information available at
www.esmap.org/filez/activity/227200722948_LACColombiarenewable.pdf.
17 Bettelli, P., Garcia, A. and Graviator, S. (2007) Interviews with P. Bettelli, A.
Garcia and S. Graviator, Designated National Authority en la Unidad de Cambio
Climatico de Ministerio del Medio Ambiente, Vivienda, y Desarrollo Territorial,
12 October
18 Ministerio de Ambiente Vivienda y Desarrollo Territorial de Colombia (2004)
Boletín del Grupo de Mitigación del Cambio Climático, vol 1, no 3, May
International, 19 October, Medellín, Colombia
Caribbean’, report for Inter-American Development Bank, Washington, DC
21 Posada, C., Daza, M., Murcia, J., Piderahita, C., Hernández, A. and Lesmes, H.
(2006) Atlas de Viento y Energía Eólica de Colombia, Instituto de Hidrología
Meterología y Estudios Ambientales (IDEAM) and Unidad de Planeación Minero
Energética (UPME), available at
www.upme.gov.co/Docs/MapaViento/PROLOGO.pdf
23 Vargara, W. (2007) Review of Policy Framework for Increased Reliance on
Renewable Energy in Colombia, World Bank Energy Sector Management
Assistance Programme, project information available at www.esmap.org/filez/
activity/227200722948_LACColombiarenewable.pdf
COLOMBIA 195

Caribbean: Two years after the Bonn Conference’, report, United Nations
25 Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Publicas de Medellín,
26 Black, T. (2007) Interview with T. Black, Executive Director of CAEMA, 9
October, Bogota, Colombia
27 US Trade and Development Agency (2007) ‘USTDA grant supports the
development of geothermal energy in Colombia’, press release, 20 September,
www.ustda.gov/news/pressreleases/2007/LAC/Colombia/ColombiaGeothermal_09
2007.pdf
28 Castillo, M. P. (2007) Interview with M. P. Castillo, Corporación Andino de
Fomento Project Developer and former DNA for Colombia, 9 October, Bogota,
Colombia
Medellín, Colombia
30 Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo,
16 October, Medellín, Colombia
31 Minsterio de Desarrollo Economico (2002) Decreto 1713, in Diario Oficial, 6
August
16
Costa Rica
Vital statistics
Portfolio mix: 75.54 per cent hydro; 15.12 per cent geothermal; 8.04 per cent
thermal; 1.3 per cent wind [1]
Average price of electricity: residential 3.79¢/kWh; industrial 3.86¢/kWh
Privatized electricity market: yes, partially
Existence of spot market: no
Capacity payment: no
Market manager: Instituto Costarricense de Electricidad (ICE)
Regulator: Autoridad Reguladora de los Servicios Públicos (ARESEP)
Policy maker: Ministerio de Ambiente y Energía (MINAE)
Future planning: Ministerio de Planeficación (MIDEPLAN)

In 1949, Instituto Costarricense de Electricidad (ICE) was created as an
autonomous state institution by the government [3]. Prior to 1990, the ICE
was in control of all transmission, distribution and generation except for small
pockets of generation provided by cooperatives and municipalities. In 1990,
Law 7200 permitted private generators to enter the market and produce
20MW each. All together these private generators were allowed by Law 7200
to make up 15 per cent of total generation [4].
There is no electricity market in Costa Rica. In most cases, generators must
accept the price that ICE offers for energy generation since they are the only
buyer. The energy prices paid are based on the cost of generation. Private
generators cannot export to the Central American regional grid by Law 7848
[5]. Power Purchase Agreements (PPAs) are rare, but ICE will engage in 20-
year contracts for hydro over 20MW [6]. Laws 8345 and 7593 do allow
independent power producers (IPPs) to sell to cooperatives and municipalities
and structure joint generation ventures with these entities in territories outside
of ICE’s control, but few IPPs know of these laws and take advantage of them
[7].
In 1995, the electrical market was opened slightly with Law 7508 which
allowed up to 30 per cent of the total market to be made up of private genera-
tors with projects up to 50MW per private installation. Also, this law
stipulated that a competitive bid process for new capacity additions occur.
Under this law, private generators are required to transfer their plant to ICE
after 18 years of operation [7].
ICE is a well-run organization that has provided 98 per cent of the
country’s citizens with electricity. This rate far surpasses that of its close neigh-
bours Honduras and Nicaragua with rates of just about 50 per cent. The
country’s grid is so hydro intensive because the country backed these initially
costly installations with the understanding that the investment would be recov-
ered over the installations’ long lives. However, new debt limits set by the
International Monetary Fund have led to a capacity shortage as ICE has not
been able to invest in costly new additions. Instead, ICE was forced to open up
the electrical sector to private investment in the early 1990s to avoid an
emergency situation for new capacity [8].
A lack of private sector involvement has led to ICE having to rent thermal
generation units and pay high prices of 19–30¢/kWh because of the high cost
of fuel [8]. At two of ICE’s thermal plants, bunker fuel used grew by 23.7 per
cent in 2007 [9]. Overall, customers still pay very little for electricity because
the bulk of it comes from hydro installations that cost almost nothing on a per
kWh basis to continue running. ICE tries to avoid paying for this rented gener-
ation by having an elicitation process for new capacity when it is needed.
However, if competitive bids are not submitted, then ICE must rent [10].
ICE is able to get PPAs for this expensive thermal generation approved by
the country’s regulator (ARESEP) because of the incredible demand growth the
country is facing; the country is expected to double its demand in just ten years.
And it is already experiencing shortages. In April and May 2007 there were
blackouts throughout the country that had never before occurred in ICE’s
proud history [10].
ICE is also able to contract this expensive temporary generation because it
has plans to implement huge hydro installations, which would supply genera-
tion for many decades in the future. The longevity of hydro energy cancels out
the high capital costs, making the average (levelized) price of electricity over
the lifetime of the hydro installation quite low in comparison with other forms
of electricity. Therefore, ICE is hesitant to contract permanent generation from
more expensive sources like wind energy that would impact tax payers for
longer than the current expensive thermal generation. However, according to
many private developers, this plan is not realistic because of the social resis-
tance to large hydro applications like the 300MW Boruca project, which has
had three name changes in the planning process and faces major opposition.
ICE planned to fulfil future demand from 2001 to 2016 with 875MW of hydro
COSTA RICA 199
projects, 20MW of wind and 27.5MW of geothermal [11]. ICE’s expansion

plan assumes that these applications will be online much sooner than they
could actually be since the permitting and construction time for dams is
lengthy. In this way, ICE is retaining control of the generation sector, paying
expensive per kWh prices for rented thermal generation, and rejecting new
renewable generation that is more expensive than the predicted future hydro
prices [8].

Costa Rica created a feed-in tariff that paid small renewable generators ICE’s
avoided costs of generation in Law 7200 of 1990. These feed-in tariffs were
paid through 20-year PPAs with ICE. The programme increased participation
of independent renewable generators to 12 per cent of the 2005 installed
capacity, but is no longer active for new developers [12].
Law 7508 of 1995 precludes ICE from buying privately generated energy
from anyone but renewable sources and requires a 35 per cent Costa Rican
ownership of these renewable sources [4, 6 and 8].
The Law of Peace with Nature (Ley de Paz con la Naturaleza) and Agenda
2021, which aim to make the country carbon neutral with regard to transport
and electrical generation, put the regulatory additionality of projects in
question. If renewable energy is outlined as a means to achieve the national
policy for carbon reduction, then renewable energy projects could not qualify
for Clean Development Mechanism (CDM) projects as this would constitute
double-counting by allowing a project to earn both national and international
credit [13].
Costa Rica is also undergoing Phase I of a National Off-Grid
Electrification Programme based on renewable energy sources, developed by
the United Nations Development Programme, the Global Environment Facility
and ICE, that may open doors to small-scale off-grid CDM projects in the
country. The goals of the programme are to both electrify off-grid sites and
reduce carbon emissions. Two million dollars have been dedicated to this
cause, and Phase II will dedicate $19 million [14].
Confusion over who should give the water permits for private hydro gener-
ation has stalled new private generation and caused the closure of 25–30MW
of generation from generators who cannot obtain a renewal permit. The issue
of who has the jurisdiction to issue these permits has been debated for two
years in the National Assembly and will be the subject of pending legislation
[15]. Some consultants and developers claim that the issue of who should issue
water permits was brought to light by ICE in order to slow private investment
in the sector. Since the hydro industry has the largest energy potential, the
question over these permits has almost completely halted the private sector
[16].
CDM portfolio
2.5
2.0
Number of projects
1.5
1.0
0.5
0
methane methane
capture capture
Figure 16.1 Projects registered or in validation in Costa Rica
There are just two hydro projects that have been registered and used arguments
of small technological breakthroughs to prove additionality. The one wind
project (La Tejona) registered was developed by Instituto Costarricense de
Electricidad and the World Bank, with a unique ownership structure that
ensured ICE did not take on too much debt. A few other wind developers, such
as Econergy International and Grupo Corporativo SARET, are interested in
wind farms near the Arenal volcano. A large geothermal application called
Miravalles has been in the plans for over ten years and may not be able to get
Certified Emission Reductions (CERs) because of its presence in the planned
expansion. A landfill gas capture and electrical generation plant near San José
is seeking registration.

DNA office
Costa Rica was involved early on in the international climate discussions. It,
along with Brazil, was instrumental in helping form the CDM. Brazil proposed
the Clean Development Fund, which would take penalty fees from European
countries that did not meet their reduction goals or taxes from European
Union Allowances (EUAs) and put it towards offsetting and climate change
adaptation projects in the developing world while Costa Rica embraced the
Norwegian idea of Activities Implemented Jointly (AIJ), the precursor to CDM
that involved tradable emission permits derived from projects in the developing
world [17]. In 1994 Costa Rica formed the Joint Implementation Programme,
and set up an office for its promotion in 1995. By 1998, the country had regis-
tered ten projects [18]. Several projects were developed under this scheme, but
COSTA RICA 201
they were later not supposed to be able to qualify for CDM (although some
like La Tejona wind farm did). The AIJ projects were not allowed to qualify for
CDM because the project requirements did not yet mandate that the project be
additional nor was there a sustainable development criterion. During these
negotiations, Costa Rica also submitted a potential baseline calculation for
future CDM projects [19].
When the Joint Implementation projects that Costa Rica registered and the
baseline calculation it submitted were not recognized as part of the CDM, folks
involved in the process became frustrated and somewhat bitter towards the
Mechanism altogether. The final rules of the CDM were not favourable to the
country because they consider the grid’s current fuel mix in order to calculate
emission reductions. Members of the climate change discussions in Costa Rica
see the work they have done as first-movers to combat rising temperatures as
detrimental to their ability to register projects. Instead of being rewarded for
their effort, they feel as though they have been penalized [19].
The Joint Implementation office was located in MINAE, but now the DNA
office is located in the National Meteorological Institute (Instituto
Meteorológico Nacional) under the National Climate Change Programme (El
Programa Nacional de Cambio Climático).

The Climate Change Consultative Committee (OCIC), consisting of represen-
tatives of the government sector, academia and NGOs, helps promote dialogue
and synchronize activities between diverse interests involved in the climate
change debate. A Costa Rican Association for Joint Implementation was
formed to work with OCIC to promote CDM in the public and private sectors
[17].
The Biomass Users Network (BUN-CA), which operates in the entire
region of Latin America, but is based in San José, Costa Rica, has taken an
active role in identifying the barriers to renewable energy by writing reports on
this topic. BUN-CA, along with Green Stream Network, helped create a
Central American Carbon Finance Guide [20]. An industry association called
Asociación Costarricense de Productores de Energía (ACOPE) has also
championed private generator’s interests and kept track of relevant policies
[13].
Carbon brokers
Ecosecurities has a representative in the country, but this person’s interest is
more in other countries in Central America because of their higher emission
factors and less state control of energy sectors [21]. Econergy International has
been involved in the development and CDM registration of a wind farm in the
country. Climate Focus helped ICE complete the La Tejona CDM process.
Otherwise, the country has little active pursuit of CDM projects on the part of
carbon brokers because of the many barriers it faces.

The country has many renewable resources given its small size. There are
600MW of unused wind potential. While it has used 1271MW of its hydro
resources, there are 4531MW more that could be exploited. Wind has a unique
possibility to complement the large amount of hydro on the grid because the
best wind resources tend to be available when it is the dry season. Costa Rica
has installed 145MW of geothermal capacity and has the potential for 90MW
more. There is most likely more cogeneration that could be developed as there
is only a total of 12MW of capacity at two facilities in the country [6].

There are many barriers to market entry for CDM project developers in the
country. The most obvious problem is that the country has so much hydro
power. This situation means that the grid’s combined margin emission factor is
only 0.18 tonnes of CO2/MWh, which results in few CERs as very little fossil
fuel-based electricity is displaced [2]. Hydro developers also face challenges
proving that new hydro projects are first-of-a-kind, technologically innovative
and not common practice since the bulk of the grid is made up by this technol-
ogy.
Because of this low emission factor, some developers and carbon consul-
tants considered selling their emission reductions on the voluntary market as
Verified Emission Reductions (VERs) that do not require such a strict baseline
calculation based on the country’s national grid emission factor. They hoped
that after the country’s grid emission factor increased from additional fossil
fuel applications being brought online they could register these projects and
attempt to convert the VERs to CERs. This strategy worked until 31 March
2007 when projects could achieve registration even after generation had begun
in a previous year. But, after this date projects had to achieve registration
before beginning generation or be in the registration process when generation
commenced in order to earn CERs [16].
The other large hurdle for CDM development in the country is the control
that ICE has on the market, prohibiting private generators from comprising
more than 30 per cent of the market and having installations above 50MW.
Those renewable generators that do want to penetrate the market have the
limitation of being owned at least 35 per cent by Costa Ricans. Also, the lack
of a competitive market means that private generators in Costa Rica must wait
until new capacity is solicited. Then, they can offer a bid, but it must be
accepted by ICE before they are assured that their generation will be bought.
ICE is not required to accept this generation [21]. The offer that the generator
gives to potential customers in power purchase agreements (PPAs) must be
competitive and therefore comparable to ICE’s avoided cost of generation,
which is approximately 5.4¢/kWh [19]. This price is so low because it is the
average or levelized cost of energy from a dam with a long life. Generators in
Costa Rica cannot earn better sale prices by selling directly to large consumers
or the Central American grid (SIEPAC) [22].
COSTA RICA 203
Early project developers that considered earning CERs from renewable

energy projects prior to 2005 were discouraged by the UNFCCC’s CDM
Methodological Panel’s decision that renewable energy installed in Costa Rica
could not fulfil both the country’s mandate and earn CERs. Therefore, few
projects were developed that were able to retroactively claim CERs between
2001, when the Marrakesh Accords passed were, and 2005, when the Kyoto
Protocol came into effect. This preclusion of participation discouraged project
developers and continues to create confusion as to whether or not they will be
able to prove additionality even though the Methodological Panel has reversed
its decision [17].
Private generators also face complications from uncertain laws dictating
their operations. The tariff calculation that determines how much private
generators will get paid for energy has changed three times since the 7200 Law
in 1990. Initially, this calculation was based on ICE’s avoided cost of genera-
tion. Then, the regulator decided on the tariff. Now, it is more closely based on
cost of generation [15]. Generators are not able to get a good sense of how
much they will be able to earn since transparency in this process is lacking and
the way that ICE predicts future fuel costs is unclear. Investors are further
confused by the current situation, which makes it unclear who allocates hydro
permits [8]. These areas of regulatory uncertainty have made investors hesitant
to become involved in generation projects.
Not only is it difficult for the private sector to participate in CDM because
of these barriers, but ICE also has difficulties because of laws that dictate its
operations. ICE is obligated to pursue the generation that is the least-cost for
the sake of providing the lowest rates for their customers. If renewable energy
is found to be the cheapest option, it will be pursued in a business-as-usual
situation, and it would be hard to demonstrate additionality for the CDM.
CDM revenues are not allowed to be factored into the financial analysis to
make renewable energy cost-competitive with other sources of generation
because these revenues are considered uncertain. Therefore, it is almost impos-
sible for ICE to initiate CDM projects. However, ICE was able to structure one
successful CDM wind project by negotiating a unique arrangement that
involved a private company called Norteco owning 75 per cent of the farm.
ICE now has the option of buying the installation over five years. This arrange-
ment and the upfront money for CERs from the Dutch CERUPT fund allowed
ICE to avoid having to ask permission to make an investment, which may have
been denied, and ultimately led to the development of La Tejona wind farm.
However, this rare purchase agreement has not been replicated [10].
Costa Rica, like other countries in the region, faces problems with the
social integration of hydro projects. Although dams are commonplace in Costa
Rica, the booming tourism industry in the country has raised questions about
new dams because they can diminish the natural beauty of rivers and prevent
tourists from rafting and kayaking. In order to prevent these problems, some
hydro projects have begun using ISO 14001 standard to appease concerns
about the environmental impacts of their operations [13].
Despite these challenges, there is an interesting possibility for Costa Rica to

be more involved in the CDM in the future. The Central American Electrical
Interconnection System (SIEPAC) will connect all Central American countries
and later possibly Colombia and Mexico with a 230kV line that is nearly double
the current capacity. The interconnection of the Central American countries
could allow large projects like the proposed 1520MW Boruca hydro plant in
Costa Rica that would have flooded any one country’s market with excess
capacity to be feasible [23]. If Costa Rica were selling significant amounts of
energy to a variety of countries and this transmission line allowed for multiple
fluid transactions between countries, then perhaps a national baseline would be
adopted. Costa Rica would benefit from a much higher emission factor that
incorporated the fossil fuel-intensive energy sectors of its neighbours.
Summary
Costa Rica has fewer CDM projects than one might expect given its stable
investment climate and need for new capacity additions. The underperfor-
mance of the Mechanism in this country is due to the strong presence of ICE
and barriers to market entry it presents, the country’s low emission factor, and
the low price that ICE will offer for generation.
References
1 Instituto Costarricense de Electricidad (ICE) (2006) ‘Datos relevantes sector elect-
ricidad’, December 2006, available at www.grupoice.com/esp/ele/planinf/
docum/datosgenerales_ele04.pdf
2 Climate Focus (2006) Tejona Project Design Document, UNFCCC, December
3 Instituto Costarricense de Electricidad (ICE) Creación del Instituto Costarricense
de Electricidad, http://www.grupoice.com/esp/ele/infobase/cre_ice.htm, accessed 15
March 2008
4 Millán, J. (1999) ‘The power sector in: Costa Rica’, Profiles of Power Sector
5 La Asamblea Legislativa de La Republica de Costa Rica (1997) Decreta 7848:
Abrobacion del Tratado Marco del Mercado Electrico de America Central y Su
Protocolo, Direccion Sectoral de Energía, 11 July
Caribe: Situacion y propuestas de politica’, 19 May
7 Millán, J. (1999) ‘The power sector in: Costa Rica’, Profiles of Power Sector
9 Business News Americas (2008) ‘ICE diesel, bunker use up in 2007’, newsbrief, 12
March
COSTA RICA 205

13 Alvarado, M. (2007) Interview with M. Alvarado, President of Asociacion
Costa Rica
14 Global Environment Facility (2002) ‘Cover note: Costa Rica: National off-grid
electrification programme based on renewable energy sources’, Project Number
1322, 8 March, available at http://gefweb.org/Documents/Council_Documents/
GEF_C20/CC_-_Costa_Rica_-_National_Off-grid_Electrification.pdf
15 Villa, G. (2007) Interview with G. Villa, Director of Energy within Ministerio de
Ambiente y Energía, Costa Rica, 27 September, San José, Costa Rica
Costa Rica
18 Leonard, A., Mintzer, I. and Michel, D. (1999) ‘Climate change, capacity building,
and the AIJ experience’, in R. K Dixon (ed) The UN Framework Convention on
Climate Change Activities Implemented Jointly (AIJ) Pilot: Experiences and
Lessons Learned, Kluwer Academic Publishers, Dordrecht, pp209–238
19 Manzo, P. (2007) Interview with P. Manzo, Director General de Instituto
Meteorológico Nacional (Costa Rica’s Designated National Authority), 27
20 Tynjälä, T. (2004) ‘Central American Carbon Finance Guide’, presentation at
Bioenergy Forum of Energy and Environment Partnership with Central America,
19 March, Antigua, Guatemala, available at www.eep-ca.org/forums/
documents/foro%20IV/ca_carbon_finance_greenstreambunca.pdf
21 Castro, M. (2007) Interview with M. Castro, Carbon Consultant for Ecosecurities,
26 September, San José, Costa Rica
22 Sandoval, J. (2007) Interview with J. Sandoval, Grupo Cooperativo SARET of
Costa Rica, 1 October, San José, Costa Rica
23 Gomez, T., Enamorado, J. C. and Vela, A. (1994) ‘Feasibility studies of a power
interconnection system for Central American countries: SIEPAC Project’, Power
Engineering Review, vol 14, no 6, June, pp11ff
17
Dominican Republic
Vital statistics
Portfolio mix: 43 per cent fuel oil #6; 18 per cent fuel oil #2; 16 per cent
natural gas; 14 per cent hydro; 9 per cent coal [1]
Privatized electricity market: partial
Market manager: Organismo Coordinador (OC)
Regulator: Superintendencia de Electricidad (SIE)
Policy maker: Comisión Nacional de la Energía (CNE)
Environmental permits: Secretaría de Estado de Medio Ambiente y Recursos
Naturales

The economy of the Dominican Republic was strong in the late 1990s, leading
to an annual electrical growth rate of 7.5 per cent from 1992 to 2001. The
state power producer, Corporación Dominicana de Electricidad (CDE) could
not keep up with this growth and blackouts were common. In a time of desper-
ation, the government began to sign Power Purchase Agreements (PPAs) with
independent power producers (IPPs). These contracts tended to benefit the IPPs
and paid high prices for electricity [4].
In 1998–1999, the power sector was privatized with the unbundling of
CDE and the reform of Public Enterprises Law 141 in 1997 [5]. Then, in 2001,
with the Electricity Law (125-01), a new holding company called Corporación
Dominicana de Empresas Eléctricas (CDEE) took over the operations of the
CDE thermal plants that had been unbundled. CDE was then in charge of just
one hydro production company, the transmission company, and the contracts
with the IPPs that it solicited in the 1990s. This law also created the requisite
regulator, market manager and policy maker for the new market [6].
The privatization of the market helped reduce the blackouts by increasing
capacity by 43 per cent. Distribution losses were also lowered and rural
populations were better served as the number of people without electricity fell
from 40 per cent in 1991 to 11 per cent in 2002 [7]. The generation sector was
86 per cent privately owned in December of 2005 [8].
Despite these gains, the government decided to renationalize distribution
companies in 2003 because rising oil prices had negatively affected the sector.
High non-technical distribution losses of 42 per cent (52 per cent including
technical losses) and frequent blackouts had returned, impacting the general
well-being of the country and prospects for tourism [3]. In 2001, the govern-
ment sought to plan blackouts in an organized way so as to subsidize and
ensure delivery of some reliable electricity to customers in poor neighbour-
hoods, but this Blackout Reduction Programme (PRA) failed because of a lack
of metering systems, an absence of incentives for distribution companies to
service these areas and a culture of non-payment for electrical services [6]. In
2002, the National Programme to Support the Eradication of Electricity Fraud
(PAEF) under Decree No 748-02 attempted to eliminate fraud, but did little to
complete its objective until 2007 when the Electricity Law was modified to
make penalties for infractions more severe [9].
The PRA programme and other national subsidization programmes for
users that consume up to 700kWh/month have tried to compensate for the
high recent prices of fossil fuels, on which the Dominican Republic relies
heavily for its generation mix. However, distribution companies have felt the
brunt of these subsidized rates as they do not receive full payment for genera-
tion sold. Since the government repossessed the distribution companies, they
have transferred the money that would have gone into health and education
into the operations of these companies. A cross-subsidy programme taxes
heavy electricity users over a certain kWh usage in order to help subsidize
minimal-use customers. Also, the subsidization rate is being changed from
customers who use 700 to those who use 200kWh/month, a more reasonable
amount that will result in fewer governmental payouts [10].
The insecure energy supply since the 1990s prompted many customers to
purchase diesel generators and other self-generation devices that are expensive
to run, but provide a more secure source of energy that allows businesses to
continue to operate. Of the projects considered for fulfilling future demand
growth, 11 per cent are hydroelectrics and 89 per cent are thermal [2]. The
high demand growth of 7.5 per cent continued until 2004 when it suddenly
decreased about 10 per cent annually from 2004 to 2006 [11].

Hydrocarbon Law 112 of 2000 included a special fund for renewable energy
and energy efficiency. This fund consisted of 2 per cent of hydrocarbon taxes
DOMINICAN REPUBLIC 209
and increased 1 per cent each year until it reached 5 per cent of the total taxes
[12].
The General Electricity Law of 2001 provided priority dispatch and
purchase preference for renewables if they are competitive with conventional
energy. Ten per cent of the penalties paid for not complying with this law go
into a fund to support renewables [13]. Companies that generate electricity
with renewable sources are exempt from taxes for five years [5]. Also,
Presidential Decree 139 of 2003 provided tax exemptions for the purchase of
solar panels and wind turbines [5].
The major piece of renewable energy legislation that has the potential to
impact the CDM market in the Dominican Republic is the Law on Incentives
for the Development of Renewable Energy Sources and its Special Regimes
(Law No 57-07) which passed in May 2007. It is applicable to a distinct group
of renewable energy producers including hydro under 5MW, wind under
50MW, concentrating solar thermal under 120MW, photovoltaic systems of
any size, biomass under 80MW, solar thermal for hot water of any size, biofu-
els production of any size and ocean resources of any size. Its main provisions
give renewable energies subsidized financing for ten years for installations, 100
per cent exemption from import taxes on equipment and tools, ten-year
exemption from income tax, tax incentives for self-suppliers and dispatch
priority. Houses or industries that self-produce from renewable energy can use
up to 75 per cent of the investment in the equipment as an income tax credit. It
also provides a favourable interest rate for 75 per cent of the cost of equipment
for communities that install small-scale renewable energy and cogeneration
projects below 5MW [14].
CDM portfolio
4
3
Number of projects
0
methane methane
capture capture
Figure 17.1 Projects registered or in validation in the Dominican Republic

Although only one wind farm had been registered as of April 2008, two others
were in the validation process, as shown by the chart above. The registered
project is the 65MW El Guanillo wind farm being developed by Parques
Eólicos del Caribe, SA, owned primarily by Gamesa. Other developers inter-
ested in wind potential for the island include Canadian AXOR, York
Caribbean Windpower, Spanish Union Fenosa, local Consorcio Energético
Punta Cana Macao (CEPM), ACRES International and TROC International
[5].

DNA office
The Dominican Republic Designated National Authority (DNA) office is
located in the Secretariat of Environment and Natural Resources (Secretaría de
Estado de Medio Ambiente y Recursos Naturales). Early in its existence, it
created relationships with Japan, Canada and the World Bank for creation of
Clean Development Mechanism (CDM) projects. It necessitated that an
additionality requirement be fulfilled for national approval. The folks from the
DNA office identified a lack of public awareness, capacity building, financing
and technological expertise as the major barriers to CDM implementation [15].

An analysis of the challenges and opportunities for CDM development in the
Dominican Republic was completed by two CDM experts and published in
Global Magazine and presented at a carbon conference in Santo Domingo with
the support of CAF (Corporación Andina de Fomento and La Fundación
Global Democracia y Desarrollo [16].
Carbon brokers
Camco International Group helped develop the El Guanillo Wind Farm Project
Design Document. There has been no movement to create carbon broker
offices or aggressive pursuit of projects by one particular firm.

There are an estimated 10GW of wind potential that can produce 24GWh of
electricity per year [17 and 18]. There is a high solar radiation factor of
approximately 5kWh/m2/day in the country. There are 500MW of undevel-
oped hydro potential available. Fifteen to 60 million tonnes of biomass per
year could be utilized for electrical production from current and former lands
used for sugarcane production [5].

The Dominican Republic suffers from having a low financial rating of CCC for
international loans, which complicates the prospect of getting hold of loans for
development [2]. The country also has a limited market for IPPs since the
DOMINICAN REPUBLIC 211
island is small and new capacity additions would have to be sized accordingly.
A legacy of past corruption in the operations of the electrical sector could
discourage investors. Also, the high rate of subsidization of electricity users has
left distribution companies in dire straits and caused them to be renationalized
by the government. Private generators may fear non-payment from distributors
given this situation.
Summary
New renewable energy legislation in the Dominican Republic could portend a
bright future for new installations. However, a corrupt electrical sector, high
rates of subsidization, a low financial rating and a small overall electrical
market will create challenges for CDM development.
References
1 Superintendencia de Electricidad de la República Dominicana (2006) ‘Capacidad
instalada por tipo de combustible’, December 2006,
www.sie.gov.do/estadisticas.php, accessed 10 March 2009
2 Gamesa Energía (2006) El Guanillo Wind Farm Project Design Document,
UNFCCC, 6 May
4 World Bank (2007) ‘Dominican Republic power sector program: Second
generation reforms’, 16 March, available at http://web.worldbank.org/external/
projects/main?pagePK=64283627&piPK=73230&theSitePK=40941&menuPK=
228424&Projectid=P082712
5 Portorreal, M. E. (2007) ‘Country or region: Dominican Republic renewable
energy overview’, report for US Commercial Service of the US Department of
Commerce, April
6 Krishnaswamy, V. and Stuggins, G. (2007) ‘Closing the electricity supply–demand
gap’, World Bank and Energy and Mining Sector Board, Paper 20, January
7 Superintendencia de Electricidad de la República Dominicana (2006) ‘Potencia no
servida (MW)’ www.sie.gov.do/estadisticas.php, accessed 12 February 2008
8 Superintendencia de Electricidad de la República Dominicana (2005) ‘Capacidad
instalada por planta por empresa a Dic-05’, www.sie.gov.do/estadisticas.php,
accessed 20 February 2008
9 Ministerio Publico: Procuraduría General de la República (2006) ‘Memoria annual
de las ejecuciones del Programa Nacional de Apoyo a la Eliminacion del Fraude
Electrico (PAEF)’, available at www.procuraduria.gov.do/PGR.NET/
Dependencias/PAEF/Documentos/memoria%20anual%20de%20las%
20ejecuciones%20del%20PAEF.pdf
10 World Bank (2006) ‘Dominican Republic country economic memorandum: The
foundations of growth and competitiveness’, Report Number 35731-DO,
Caribbean Country Management Unit Latin America and the Caribbean Region,
September
11 Superintendencia de Electricidad de la República Dominicana (2006) ‘Demanda
máxima abastecida (MW)’, www.sie.gov.do/estadisticas.php, accessed 20 February
2008
12 Congreso Nacional de La República Dominicana (2000) Ley de Hidrocarburos

112-00, law
13 Congreso Nacional de La República Dominicana (2001) Ley General de
Electricidad Ley No 125-01, law
14 Congreso Nacional de La República Dominicana (2007) Ley No 5707 sobre
Incentivo al Desarrollo de Fuentes Renovables de Energía y de sus Regímenes
Especiales, May
Caribbean’, report for Inter-American Development Bank, Washington, DC, 2
June
16 Figueres, C. and Álvarez, M. (2006) ‘Retos y oportunidades para la República
Dominicana’, Global, April, available at http://figueresonline.com/publications/
Retos_y_Oportunidades_final.pdf
Caribe: Situacion y propuestas de politica’, report prepared for the delegates of the
Second World Renewable Energy Forum in Bonn, Germany, 29–31 May 2004, 19
May, available at www.funtener.org/pdfs/Lcl2132e.pdf
18 Elliott, D. (1999) ‘Dominican Republic Wind Energy Resource Atlas
development’, presented at SATIS ’99 Conference, San Juan, Puerto Rico, 25–27
August
18
Ecuador
Vital statistics
Portfolio mix: 50 per cent hydro; 29 per cent petroleum; 9.1 per cent imported;
6.6 per cent internal combustion engines; 3 per cent natural gas; 1 per cent
biomass [1]
Privatized electricity market: yes, with limited success
Capacity payment: $5.7/kW (payment also takes into account the capacity
factor (percentage of time generation occurs) of resource) [1]
Market manager: Centro Nacional de Control de Energía (CENACE)
Policy maker: Ministerio de Electrificación y Energía Renovable
Regulator: Consejo Nacional de Electricidad (CONELEC)
Environmental permits: Ministerio del Ambiente

The Ecuadorian electrical sector is a complex story that stems partially from
the black losses in the system, as energy is lost in transmission and distribution
or stolen, and partially from the controlled price of electricity sold to
consumers below cost. Normal transmission and distribution losses for an
inefficient system total about 7–8 per cent. However, an average of 23 per cent
losses are experienced as people from both rich and poor neighbourhoods
illegally split electrical lines and draw electricity for their own uses. Current
rates are structured to recover 14 per cent of these black losses, but some
individual companies are losing up to 42 per cent of their energy in this way
and going into irrecoverable debt [4].
One may think that the problem is isolated to poor neighbourhoods, but it
is equally as prevalent in rich, gated communities. The phenomenon of stealing
electricity in Ecuador in rich neighbourhoods can be equated to the way some

North Americans split cable lines and access cable television without paying
for it. However, the problem in Ecuador is much larger. Other black losses that
occur in less fortunate neighbourhoods are full of people who have migrated
from the countryside to the city for more job opportunities. Large settlements
of sprawling houses hook into lines that are headed to or from the city. When
utility representatives attempt to enter neighbourhoods where this theft is
occurring, they are met with armed resistance from inhabitants. The problem
has escalated to the point where even the police are not adequately armed to
enter these areas with the hope of disconnecting the electricity; national army
personnel are assigned to these tasks [5].
Surrounding countries, such as Colombia and Peru, had similar problems
as the culture of paying for electricity had not been instilled in the public.
However, aggressive campaigns to promote a culture of electrical bill payment,
install better metering devices and improve old transmission and distribution
corridors had dramatically reduced losses from close to 25 per cent in 1995 to
16 per cent in Colombia and 11 per cent in Peru by 2005 [6 and 7]. Some of
their tactics to encourage bill payment included providing free professional
soccer tickets for a percentage of those who paid their bill in a timely fashion
[5]. Corporación Andino de Fomento (CAF) was working on a programme to
decrease these losses, but the loan for this programme never came through. The
market regulator, called Consejo Nacional de Electricidad (CONELEC), has a
programme in place to address these losses, but has not yet executed this
programme [1].
This problem of black losses has led to a situation where distributors
cannot pay generators. Typically, generators will only receive 85 per cent of
what they are due. Then the generator will have to petition to get the remaining
15 per cent and typically experiences long delays in payment [8]. Machala
Power, a privately operated natural gas installation, has sued a distribution
company for non-payment, pointing to generation contracts with Colombia,
which are pre-paid, and claiming that Colombian generators receive preferen-
tial treatment [5].
The situation is exacerbated by the fact that the distributor cannot, by law,
raise customer rates to compensate for these losses. Therefore, these companies
cannot make the requisite upgrades in their system to avoid distribution losses
and provide better metering. Given their limited resources, the Ecuadorian
government had to set up a pay order, which stipulated that Colombian gener-
ators that export energy into Ecuador would be paid first while domestic
generators would be paid with the remaining funds [9].
This underpayment situation to domestic generators would lead one to
believe that generators prefer to structure Power Purchase Agreements (PPAs)
with large consumers in order to ensure payment for electricity generated, but
ironically most still prefer the spot market. Prices for energy in the spot market
vary based on the cost of the last dispatched energy on the system, but genera-
tors typically can earn three to four times as much as they can in PPAs.
ECUADOR 215
Long-standing, state-run hydroelectric applications that were transferred to

privately run generation facilities have paid off the capital costs of the system
and now are able to generate electricity for approximately 1–2¢/kWh and sell
it in PPAs for about 3¢/kWh [8].
The inability of new private generation to compete with these existing
hydro facilities in PPAs necessitated an executive decree that established the
formation of the Fondo de Solitaridad to oversee contracts between state
generators and state distributors. It makes sure that costs get covered and a bit
of profit is made and ensures that generators have to sell to distributors, not
large consumers in PPAs [1 and 5].
The lack of money that private generators are able to earn through PPAs
and difficulty earning payments through distributors because of the black
losses has meant that the privatization of the electrical sector in 1996 with Law
R.O.S. 43 (Ley de Regimen del Sector Eléctrico) has not stimulated the private
sector interest expected. Only one natural gas and three private hydro develop-
ers entered the Ecuadorian market between 1996 and 2007 [10]. And 17 of the
18 distribution companies are still of state origin. The lack of capacity added to
the system has led CONELEC to contemplate incentives that stimulate new
capacity additions. Some of these incentives for renewable energy are described
in the following section. However, electric rates cannot be impacted too much
by the introduction of these incentives since that would jeopardize citizens’
ability to pay their bills [1].
As a result of this situation, the grid currently imports approximately
10–14 per cent of its energy from Colombia. Transelectric, the Ecuadorian
national transmission company, built a 220MW line to connect the countries
and is starting a line to double this capacity in February of 2008. This energy
comes primarily from the San Carlos reservoir in southern Colombia and is not
always secure. Its delivery depends on water levels and guerilla activity as the
line is in an area that is susceptible to attack [5]. The remainder of the grid
consists of 44 per cent hydro and 46 per cent thermal generation that comes
primarily from domestic oil and gas. Therefore, Ecuador has a high emission
factor of 0.64 tonnes of CO2/MWh [2].
The government has begun to pursue long-term solutions to the current
capacity shortage by creating a new Ministry of Electrification and Renewable
Energy in 2007. The goal of this new ministry will be to take advantage of the
supposed 35,000MW of the country’s hydro resources, of which only
3000MW has been developed. The trend is to build big, new hydro projects,
such as the Coca Codo Sincallres (~1500MW), Sopladora (~400MW), Minas
la Union (~300MW) and Pilaton (~200MW) [11].
These large hydro plants would necessitate a movement away from privati-
zation and back to the state as they would require huge capital costs and loans
that private investors would not risk. This movement of generation going back
to being owned by the state is consistent with the current president’s attempt to
nationalize subsurface minerals [1].

In order to stimulate more capacity additions and insulate customers from
volatility in fossil fuel prices, the government provided general incentives for
new capacity under the Organic Law of Guarantees to Promote New
Electricity Generation and aggressive renewable energy incentives in the form
of feed-in tariffs in 2004 under Regulation 004 [12]. Renewable energy is
defined by this law as hydro under 10MW, and wind, solar, biomass and
geothermal up to 15MW. Larger renewable energy applications can be built,
but the installation will only receive the feed-in tariff for the portion of the
system that is within the size limit [13].
The feed-in tariffs are reset every two years based on international prices of
generation from each type of technology. See the table below for current feed-
in tariff prices. Generators are guaranteed the current feed-in tariff prices for
12 years from the date of their plant’s first day of generation. Also under this
regulation, qualifying renewable energy gets guaranteed dispatch and, under a
revision submitted by President Nebot in 2005, developers are exonerated
from import and income taxes [14].
These feed-in tariffs apply as long as renewable energy constitutes less than
2 per cent of the country’s generation. Most of the qualifying renewable energy
generation that is fulfilling this 2 per cent quota comes from sugarcane
producers who are burning the husks of their crop to produce electricity that
sustains their operations and is fed into the grid. While Ecuador has been
meeting the 2 per cent limit for several years, the 3 per cent of annual electrical
demand growth has prevented the feed-in tariff from disappearing, as 2 per
cent of the country’s generation continues to grow [13 and 15].
These incentives are meant to help renewable energy compete with firm
capacity, which is always available, since thermal generators receive capacity
payments that are almost high enough to cover the first cost of a gas turbine
[1]. Thus far they have already begun to instigate development, with five new
sugarcane bagasse combined heat and power projects and three wind projects
under contract and in the process of licensing by the end of 2006 [16].
Table 18.1 Feed-in tariff prices
Generation source Price (¢/kWh) in Price (¢/kWh) in

continental territory Galapagos Islands
Wind 9.39 12.21
Photovoltaic 52.04 57.24
Biomass and biogas 9.67 10.64
Geothermal 9.28 10.21
Hydro up to 5MW 5.8 6.38
Hydro 5–10MW 5 5.5
Source: Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El mecanismo de desarrollo limpio en Ecuador: Un
diagnostico rapido de los retos y oportunidades en el Mercado de Carbono’, report for Banco Interamericano de
Desarrollo and Ministerio del Ambiente and Corporación Interamericana de Inversiones
ECUADOR 217
CDM portfolio
10
9
8
Number of projects
7
6
5
4
3
2
1
0
methane methane
capture capture
Figure 18.1 Projects registered or in validation in Ecuador
Ecuador’s Clean Development Mechanism (CDM) portfolio has shown

tremendous growth from 2006, when only three were registered, to 1 April
2008, when 16 projects were either registered or in validation. The existing
wind project is in the Galapagos Islands. There are a few wind projects in Loja
such as Villonaco (15MW) and Huascachaca (30MW) in the pipeline. The
15MW wind farm called Salinas was able to get all permits, but development
was stalled because it was not of a capacity that was big enough to attract the
attention of international turbine manufacturers during a time of high turbine
demand.
A few more sugarmills (Ingenio Azucarero del Norte and Ingenio
Monterrey) are interested in developing biomass projects. Some local develop-
ers like Alquimiatec are interested in geothermal extraction. Alquimiatec wants
to pursue extraction of shallow geothermal sites like Chalupas just 90km from
Quito that would lend themselves to hot rock extraction where water is
injected in the ground and then used to heat methanol when it returns to the
surface. This technique allows for electrical generation even from more shallow
perforation holes that do not require such high capital costs [8].
Also, Ecuador has plans to greatly expand capacity with new hydro appli-
cations including Coca Codo Sinclair (1.5GW; $1.59bn investment), Sopladora
(400MW, $400mn), Minas Jubones (335MW, $552mn), Toachi Pilatón
(228MW, $452mn); Chespi (167MW, $275mn), Baeza (60MW, $105mn),
Quijos (50MW, $87.5mn) and Ocaña (26MW, $36.7mn). The government
began work on Coca Codo and Sopladora on 7 April 2008 [17].

DNA office
Ecuador followed Peru’s lead in establishing separate promotion and regula-
tory offices to handle CDM projects in 2001. It was one of the first CDM
offices because Ecuador was involved in the CDM precursor known as
Activities Implemented Jointly (AIJ) that Costa Rica and other Latin countries
became involved with in during the late 1990s. The Corporación Andina de
Fomento (CAF)’s Latin American Carbon Programme (PLAC) first funded the
office’s activities [18]. The promotion arm is handled by CORDELIM (Oficina
Nacional de Promoción del Mecanismo de Desarrollo Limpio) and runs on
grants from United Nations Environment Programme, Banco Interamericano
de Desarrollo, Corporación Interamericana de Inversiones, Risø National
Laboratory of the Technical University of Denmark, and others. Like the
Peruvian promotion office, having the operating budget met by grants means
that the office is in constant jeopardy of being closed as funds may dry up.
However, in its operation time, CORDELIM, which is divided into four sectors
that address renewable energy, urban development, industrial development and
forestry, has helped create a national baseline for easier calculations within
Approved Consolidated Methodology 0002, grid-connected, renewable energy
methodology and the small-scale, grid-connected renewable energy methodol-
ogy. It has also completed a lengthy study in Spanish entitled ‘The Clean
Development Mechanism in Ecuador: A Rapid Diagnostic of the Risks and
Opportunities in the Carbon Market’ [19].
The regulatory arm of the Designated National Authority (DNA) office takes
20 per cent of the former UNFCCC registration costs in order to process projects
and to determine whether or not they fulfil the country’s goals for sustainable
development. This cost turns out to be 3–6 per cent of the overall CDM revenues.
Smaller projects with lower capacities are taxed more since processing these
projects requires the same amount of effort, but they generate fewer Certified
Emission Reductions (CERs). This cost could be a deterrent in the future for small-
scale project development. This office uses that money to visit project sites and
evaluate the information they submit in order to achieve registration. However, the
DNA office does not have any set matrix for assessing these projects [20].

Ecuador launched a programme in 2002 called PROMEC (Power and
Communications Sector Modernization and Rural Services Project), financed
by the International Bank for Reconstruction and Development and Global
Environment Fund, to serve off-grid electrical needs with private sector renew-
able generators that could qualify for CDM revenues [18].
The new Ministerio de Electrificación y Energía Renovable could provide
additional support and funding for renewable energy projects. Thus far, as
previously mentioned, the office’s focus is on large hydro to meet the country’s
growing demand and shortage of independent power producer (IPP) interest.
ECUADOR 219
Carbon brokers
No major carbon brokers have their offices in Ecuador. MGM International
and Ecosecurities are active in the country, but do not have plans to establish
fixed offices.

Current detailed studies of renewable energy potential for Ecuador do not
exist. CONELEC is interested in updating studies completed in the 1990s.
INECEL (Instituto Ecuatoriano de Electrificación), which existed until the
sector was restructured in 1996, completed a study showing that there are
21,520MW of economically and technically viable small and medium hydro
sites for development in Ecuador. Various coastal and Andean sites have been
measured for wind potential and show promising average wind speeds between
4.4 and 7.9 metres per second. Ecuador receives an average of 2.98kWh/m2 of
solar radiation per day. Some sites in the Andes and Galapagos Islands have
even better average insolation values of close to 5kWh/m2 per day, making
them very interesting for development. Biomass from crop residue such as
sugarcane, bananas, corn, rice, palm and fruits could potentially generate
4300GWh annually and 2155GWh if converted to biogas. Municipal solid
waste and animal carcasses could generate 3966GWh of electricity annually or
1249GWh if converted to biogas. In 2001, CONELEC did a study that identi-
fied 534MW of installed capacity for geothermal potential at three sites in the
Andes and found 17 other sites of interest that merit further study [12].

Ecuador is a difficult place for foreign investment because of a very unstable
economic environment. The country has suffered from military coups and
corrupt presidents, which has led to the position of president being held by six
different people between 1998 and 2007. In this year, the local currency was
devalued so much that the country eventually abandoned its currency in 1999
and adopted the US dollar. In this transition, 23 banks went bankrupt and
foreign and domestic investors lost holdings [21]. Spaniards and Canadians
were involved in a hydro project at the time and backed out after $500,000 for
the project was frozen in the bank. Ecuador’s economy has begun to recover
from the 1998 crisis, but now that the dollar is used, developers have noticed
that machinery, which primarily comes from Europe, is very expensive since
the US dollar is weak in comparison to the euro [10].
The most overwhelming barrier to renewable energy project development
currently in Ecuador is the resistance to hydro projects from local communi-
ties, who are often supported by NGOs. The root of this conflict is found in a
Water Law of 1972 that gave all water rights to the state in order to prevent
conflicts between landowners over irrigation rights. When the law was written,
privately owned hydro developments were not considered. Now, these installa-
tions exist and have created complications as they give developers a legal
argument for taking water from locals [22]. As a result of this law, Ecuador,
like many other countries in the region, has had a wealth of hydro development
that was considered unfavourable by indigenous groups and NGOs. In
Ecuador, Paute (1075MW), Daule Peripa (213MW) and Agoyan (160MW)
flooded much land and displaced local people [23].
Hydro developers claim elected local authorities are siding with locals and
preventing project development in order to earn votes. Then, when developers
do gain permission to develop the project, they are sometimes extorted by the
community for unreasonable demands [10].
Environmental groups like Acción Ecológica are supporting the resistance
to hydro development of all types, claiming that they fight on behalf of
communities that have had their own, vital water rights taken away because of
the national rules for allocating water rights, which are sold to private develop-
ers. This opposition is particularly strong now that the government is
favouring new large hydro installations to fulfil demand. This NGO and other
indigenous movements are trying to change the law to transfer the water rights
from the state to the provincial or municipal level [10]. Acción Ecológica
assesses the Environmental Impact Statement provided by developers and
explains the effects of the dams to the communities in order to ensure that the
community understands the full effects of the development [24].
One hydro developer has eliminated social problems by allowing the
community to own 25 per cent of the project through an agreement with a
‘Canje de Deuda’ or debt exchange in Spain. This agreement gives the locals
partial ownership of the project, covering $2.2 million of community equity,
and cancels $2.2 million of debt Ecuador owes to Spain in exchange for Spain
having the first rights to buy the CERs from the hydro project at the market
price. The community’s profits from the project will go into a trust fund for
projects that are mutually decided upon by a committee of community leaders
and the hydro project owners. As a result of this joint ownership, the commu-
nity is not opposing the development [25].
Summary
Ecuador has enormous potential for renewable energy development because of
its plentiful natural resources suitable for development and dire need for more
capacity. The aggressive feed-in tariffs also provide a strong incentive for devel-
opers. However, a tumultuous political history and black losses that prevent
distributors from making timely payments to generators slow developers’
momentum. And recent social conflicts have complicated new hydro develop-
ment.
References
1 Bustamente, M. M. (2007) Interview with M. M. Bustamente, Administrator for
CENACE, 26 October, Quito, Ecuador
2 Corporación Andino de Fomento(2006) Ecoelectric-Valdez bagasse cogeneration
plant Project Design Document, UNFCCC, 16 June
ECUADOR 221
3 CONELEC (2004) ‘Cargos tarifarios para el consumo eléctrico de clientes

regulados’, www.conelec.gov.ec/, accessed 30 March 2008
4 CONELEC (2006) ‘Pérdidas de energía de las empresas eléctricas distribuidoras’,
www.conelec.gov.ec/, accessed 5 April 2008
7 Ministerio de Energía y Minas de Peru (2005) ‘Capítulo 7: Pérdidas de energía
eléctrica’, available at www.minem.gob.pe/archivos/dge/publicaciones/
anuario2005/cap7.pdf
Quito, Ecuador
9 Melendez, E. (2008) Interview with E. Melendez, Former CENACE employee,
10 April
10 Duran, L. (2007) Interview with L. Duran, Equigener Project Developer,
24 October, Quito, Ecuador
11 Oliva, P. and Moreno, A. R. (2007) Interviews with P. Olivia and A. R. Moreno,
CONELEC Administrators in the Unidad de Gestion Ambiental, 26 October,
Quito, Ecuador
Desarrollo Limpio en Ecuador: Un diagnostico rapido de los retos y oportunidades
en el Mercado de Carbono’, report for Banco Interamericano de Desarrollo and
Ministerio del Ambiente and Corporación Interamericana de Inversiones
13 Carrión, R. (2007) Interview with R. Carrión, CONELEC Administrator in
Planning, 26 October, Quito, Ecuador
14 Registro Oficial Ecuador (2005) Ley de Beneficios Tributarios para Nuevas
Inversiones Productivas, Generacion de Empleo, y Prestacion de Servicios,
18 November
15 CONELEC (2006) ‘Balance de la energía total producida e importada’,
www.conelec.gov.ec/, accessed 12 April 2008
17 Business News Americas (2008) ‘Ocaña, Sopladora works start, Coca Codo due
late April’, newsbrief, 7 April
20 Cornejo, J. (2007) Interview with J. Cornejo, Designated National Authority of
Ecuador in the Unidad del Cambio Climático de la Comisión Nacional del Medio
Ambiente, 25 October, Quito, Ecuador
21 The Heritage Foundation and The Wall Street Journal (2008) ‘Index of Economic
Freedom’, www.heritage.org/index/country.cfm?id=Ecuador, accessed 14 April
2008
22 Ministerio de Energía y Minas de Ecuador (1972) Ley de Aguas, 30 May,
www.mineriaecuador.com/leyes/LAguas.htm
23 Noboa, I. (2006) ‘Investing in renewable energy in Ecuador: An investor’s

opinion’, presentation 29 November, for the Sustainable Energy and Climate
Change Initiative (SECCI) of the Inter-American Development Bank, available at
http://grupobid.org/secci/documents/Isabel-Noboa-Laminas.pdf
24 Reyes, D. (2007) Interview with D. Reyes, Acción Ecológica Director of Hydro
Project, 26 October, Quito, Ecuador
25 Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria Project Developer,
28 October, Quito, Ecuador
19
El Salvador
Vital statistics
Portfolio mix (by installed capacity): 37 per cent hydro; 50 per cent conven-
tional thermal; 12 per cent geothermal [1]
Capacity payment: no, obligation to contract [4]
Market manager: Unidad de Transacciones (UT)
Regulator: Superintendencia General de Electricidad y Telecomunicaciones
(SIGET) Mercado de Contratos, and el Mercado Regulador del Sistema (MRS)
Policy maker and future planning: Dirección de Energía Eléctrica (DEE) in
Ministerio de Economía (MINEC)
Environmental permits: Medio Ambiente y Recursos Naturales (MARN)
Rural electrification: Fondo de Inversión Nacional en Electricidad y Telefonia
(FINET)

In 1945, the state-run utility, Comisión Hidroeléctrica Ejecutiva del Río Lempa
(CEL), was formed to ‘develop, conserve, administer, and use’ the natural
energy resources of the country [2]. El Salvador’s electrical grid was privatized
in 1996 with the Electricity Law (Decree No 843). Prior to this decree, CEL
provided all generation, transmission and distribution services. CEL sold its
thermal business and retains control of its transmission and hydropower. Now
there are five private generators that connect to the main grid and make up 60
per cent of the country’s capacity [5]. Eight other companies generate electric-
ity and hook into distributed transmission grids. These generation companies
can, by law, be vertically integrated, providing distribution and transmission as

well, but the accounting of each component must be separate [6]. Also, these
companies cannot own shares in Empresa Transmisora de El Salvador,
currently the only transmission company [7].
Decree 843 also created a wholesale market. CEL remains the primary
seller of electricity in this market, allowing for little competition.
Interconnections with Guatemala added new players, and when the SIEPAC
transmission line is complete, Honduras should also add competitors. The
wholesale market also includes contracts between large consumers and genera-
tors. These contracts are not regulated and involve the physical delivery of
electricity based on agreed-upon volumes. Non-contracted energy is exchanged
on the Mercado Regulador del Sistema (MRS). Price and volume bids and
offers drive this market, which is overseen by the Unidad de Transacciones
(UT). Generators can sell directly to customers, or retailers can be involved in
the sale of electricity. There has been market activity in this commercialization
sector on the part of retailers [8].
Despite El Salvador’s attempt to create a highly privatized market with no
restrictions of the wholesale and retail competition, the system was too small
to allow for effective competition. Few generators participated because of
fluctuating electricity prices, and insufficient incentives caused a lack of compe-
tition on the spot market. Therefore, this original market model of 1996 has
been revised to allow for safeguards and more closely resembles other markets
in Central America [4].
Overall, the Salvadorian grid is quite efficient compared with others in the
region; its average losses are only 3–4 per cent [9]. The country has a high
electrical growth, averaging 7 per cent annually in the 1990s and 6.4 per cent
projected for 2000–2010 [8]. However, since the overall grid capacity is just
over one gigawatt, generators have to wait until sufficient capacity is needed if
they are going to add a large application to the grid.
The National Energy Council was created in 2006 to analyse El Salvador’s
energy situation and offer recommendations for new actions and strategies. It
has a special focus on renewable energy and energy efficiency to avoid El
Salvador being impacted greatly by high oil prices. This focus on renewables is
a result of high oil prices, which hit El Salvador particularly hard since it relies
on conventional thermal generation for 50 per cent of its energy portfolio. The
rest of El Salvador’s grid consists of 37 per cent hydroelectric and 12 per cent
geothermal for a total of 1312MW [1].

A 2007 National Energy Policy set objectives for the energy sector with a
special focus on renewable energies and predicted the addition of 50MW of
wind, solar, biomass and mini-hydro generation in the next ten years. Also, in
November 2007, a Fiscal Incentives Law for the Promotion of Renewable
Energy was passed. This law provides an exoneration of taxes on renewable
EL SALVADOR 225
energy projects below 10MW for ten years. Projects of 10–20MW are exempt
from taxes for five years. These projects do not have to pay taxes on Certified
Emission Reduction (CER) revenues from projects. In order to achieve the goal
of 50MW of new renewable generation, there is an earmark for investments in
new, small renewable generation [10]. Projects below 5MW have streamlined
procedures for earning concessions for development [5].
A fund for renewable energy that would help provide soft loans, which
have below-market rates of interest, and make up the price difference between
conventional and renewable energy in Power Purchase Agreements (PPAs),
called the System for the Promotion of Renewable Energies in Small-Scale
Projects (SIFER), has been discussed for years, but ultimately was not included
in this law [11]. This fund is being developed by El Salvador’s Ministry of
Environment and Natural Resources and the government of Finland’s Energy
and Environment Partnership (EEP) with Central America or Alianza en
Energía y Ambiente (AEA) con Centroamérica. This fund would provide
partial guarantees for loans and funding for feasibility studies, facilitate stable
energy price payments for ten years and offer a guarantee of financial compen-
sation for the price difference between producing conventional and renewable
energy. It would also have a Revolving Guarantee and Stabilization Fund
(FOGES), which would provide soft loans for renewable generators for ten
years and guarantee special generation prices. Although there has been much
talk about implementing these incentives and it may happen in the future when
the funds’ financing is resolved, they were not incorporated in the 2007 renew-
able energy law [12].
CDM portfolio
Geothermal projects have had success in El Salvador even though a portion of
the grid’s needs were filled with these resources prior to the Clean
2.5
2.0
Number of projects
1.5
1.0
0.5
0
methane methane
capture capture
Figure 19.1 Projects registered or in validation in El Salvador

Development Mechanism (CDM). The LaGeo geothermal plant run by a

division of the state-run company has achieved registration. Also, an exten-
sion of the Berlin power plant owned by Geotérmica Salvadoreña (Gesal),
which added 40MW to the existing plant with ten new perforation holes, has
been registered [13].

DNA office
The country’s CDM office is located in the Ministerio de Medio Ambiente y
Recursos Naturales (MARN). It completed a baseline study of the average grid
factor for small-scale projects with the financial support of the government of
Finland though the World Bank’s Prototype Carbon Fund. The average calcu-
lated, 0.725 tonnes CO2/Wh, portends a high potential for energy-related
CDM projects [1]. Other goals of this office include identifying CDM projects,
facilitating involvement from various industrial sectors in CDM, promoting
international cooperation to reduce transaction costs, and completing a green-
house gas inventory. The Designated National Authority (DNA) office was
slow to come up with concrete sustainable development criteria and a series of
six steps for project developers to follow when navigating the process, which
should take no more than 45 days [5].

There is interest from the Universidad Centroamericana ‘José Simeón Cañas’ to
apply the CDM in El Salvador. MARN partially funded a study with partici-
pants from this university that accessed the potential for the CDM in the
country. This study outlined the following barriers to project development: the
lack of long-term PPAs, the absence of renewable incentive laws, the dearth of
beneficial financial mechanisms for renewable energy projects, little reliable
information on available resources or CDM opportunities and slow permit
processes for small-scale generation projects [5].
Technical assistance in identifying six microhydro sites in the country was
provided by the NGO La Asociación Saneamiento Básico, Educación Sanitaria
y Energías Alternativas (SABES) and the Energy and Environment Partnership
with Central America (EEP) of the government of Finland. El Salvador has also
created two technical governmental committees to help promote the CDM.
They helped with the baseline study and creation of national sustainable devel-
opment criteria [5].
Turning to institutional barriers, some critics of the El Salvadorian electri-
cal structure in general believe the privatization policies implemented with
Decree 843 contain some obstacles to development. A study commissioned by
the Inter-American Development Bank found that
the institutional framework fails to provide a defined body that

will formulate policies for the sector, and doesn’t establish a
EL SALVADOR 227
coordinating entity for the energy sector at large. Moreover, no

entity is assigned to perform system-planning functions, indica-
tive or otherwise. [8]
Furthermore, the vertical integration allowed under the current law could
reduce competition as natural monopolies form to serve customers of certain
geographic areas. These market flaws could deter private generators from
entering the market as they fear it will be poorly regulated and administered.
Carbon brokers
There are few carbon brokers involved in the country. The CDM project cycle
for most projects has been taken on by development banks or the project
developer.

There are 1742MW of developable hydro potential in El Salvador and only
422MW are developed. Of this hydro potential, 286MW are small hydro [5].
The Solar and Wind Energy Resource Assessment (SWERA) maps cover El
Salvador but show that there is little potential in the country except for at a few
sites on the northern coast. There are three cogeneration units, with an
installed capacity of 48MW, or 1.6 per cent of the country’s generation. Each
year, the sugarcane harvests for each sugarmill increase, which provides CDM
opportunities to make generation and heat production more efficient [5]. El
Salvador takes advantage of its geothermal potential of 161MW with a 95MW
plant called Ahuachapán and a 66MW one called Berlin, but there is another
171MW of potential geothermal resources that could be utilized [2]. An expan-
sion of the Berlin plant for CDM credit and a new plant called Cuyanausul
combined add 64MW [1]. In the country, only two landfills are plastic-lined
and suitable for CDM development. One of them, La Nejapa, has already been
developed, and only Pasaquina remains for development [5].

The lack of renewable energy incentives prior to 2007 has led to more thermal
generation, which has a quick payback time. The most commonly used thermal
generation is bunker fuel #6, which has led to an increase in greenhouse gas
emissions of 13.4 per cent between 2000 and 2005 [5].
Civil war through the 1970s and 1980s damaged much of the country’s
transmission system [8]. This occurrence, along with devastating natural disas-
ters such as Hurricane Mitch in 1998 and an earthquake and landslide in 2001
have hindered the electrical sector and scared off some potential foreign
investors [14].
Summary
Benefits to CDM development in El Salvador include an open electrical market,
a high grid emission factor due to thermal generation, and some institutional
support for projects. Also, the government has begun to favour renewable
generation with a new set of incentives that could spur development. Weak
regulatory institutions that guide and regulate energy policy could be an obsta-
cle for development. Finally, the country’s violent history could deter investors.
References
Renewable Energy Forum in Bonn, Germany, 29–31 May 2004, 19 May, available
3. World Bank (2005) Benchmarking data of the Electricity Distribution Sector in
5 Sanchez, I. A. (2006) ‘Estudio sobre la aplicación del mecanismo para un
desarrollo limpio en El Salvador’, report for Ministerio de Medio Ambiente y
Recursos Naturales, La Cooperación Internacional de Japón and Universidad
Centroamericana, June
6 Ministerio de Economia Gobierno de El Salvador (n.d.), ‘Energía Eléctrica:
Centrales Generadores’, www.minec.gob.sv/default.asp?id=97&mnu=66, accessed
20 December 2007
7 Empresa Transmisora de El Salvador (n.d.), ‘Quienes somos’,
www.etesal.com.sv/mercado.asp, accessed 20 December 2007
8 Millán, J. (1999) ‘The power sector in: El Salvador’, Profiles of Power Sector
9 Unidad de Transacciones (2001) ‘Perdidas de transmisión’, Informe Estadistico,
http://216.184.107.60:8080/c/document_library/get_file?folderId=10271&
name=DLFE-125.pdf, accessed 12 January 2008.
11. Red de Oficinas Económicas y Comerciales de España en el Exterior (2007) ‘El
Salvador aprueba una Ley con incentivos para inversiones en Energía Renovable’,
notice in La Prensa Gráfica, 10 November, available at
www.oficinascomerciales.es/icex/cda/controller/pageOfecomes/
0,5310,5280449_5282927_5284940_4030184_SV,00.html
12 Matute, L. J. (2006) ‘Incentivos a las energías renovables en Centroamerica’,
presentation for Alianza Energía y Ambiente con Centroamerica, 15 February, San
Salvador, available at www.eep-ca.org/forums/documents/forovii/
incentivos_energia_matute.pdf
EL SALVADOR 229
13 UNFCCC (2006) Corporación Andina de Fomento, LaGeo, SA de CV, Berlin

Geothermal Project, Phase Two Project Design Document, 6 February
14 Pollack, R. (2006) ‘El Salvador: The makings of Gangland’, Public Broadcasting
Systems, Wide Angle, 11 July, available at www.pbs.org/wnet/wideangle/episodes/
18-with-a-bullet/photo-essay-el-salvador-the-makings-of-a-gangland/1393/
20
Guatemala
Vital statistics
Portfolio mix: 41.3 per cent hydro; 1.8 per cent geothermal; 56.9 per cent
thermal [1]
Average price of electricity: residential 15.14¢/kWh (2003); industrial n/a [3]
Privatized electricity market: yes, partially
Capacity payment: yes, tended to favour generators and increased 2.4–3.3 per
cent until 2006 [4]
Market manager: Administrador del Mercado Mayorista (AMM)
Policy maker: Dirección General de Electricidad of Ministerio de Energía y
Minas (MEM)
Regulator: Comisión Nacional de Energía Eléctrica (CNEE)
Environmental permits: Ministerio del Medio Ambiente y Recursos Naturales
(MARN)

The Instituto Nacional de Electrificación (INDE), a state-run, semi-
autonomous and decentralized organization, was formed in 1959 to electrify
the country and develop energy sources. In 1997, the power sector was
reformed with the General Electricity Law because of INDE’s inability to serve
the growing demand. This law caused INDE and EEGSA (Empresa Eléctrica de
Guatemala), the country’s largest distribution company, to be debundled. A
market regulator (Comisión Nacional de Energía Eléctrica (CNEE)), policy
maker (Ministerio de Energía y Minas (MEM)), and market manager
(Administrador del Mercado Mayorista (AMM)) were created to run the newly
formed privatized market. The restructured market included a spot market that
began operations in 1998 and aimed to lower electricity costs by transferring
the risk involved in Power Purchase Agreements (PPAs) to private investors

from taxpayers. PPA prices fluctuated based on international oil prices and
foreign exchange risk [4]. The reform worked, and $535 million of new invest-
ment entered the country between 1997 and 2000. However, as oil prices rose
between 1999 and 2000, the government began covering price fluctuations in
PPAs with subsidies.
The portfolio mix of generation has changed in the country over time.
While in the 1980s it used to be close to 80 per cent hydro and 20 per cent
fossil-fuel based, now that ratio is reversed because of demand and drought
[5]. Guatemala also has a high annual demand growth, with an average during
the last few years of 8 per cent. A 5 per cent demand growth is predicted
annually in the short term for the coming years [6].
Despite this high demand growth, up until 2003 distributors did not have
to make solicitations for new capacity as the 1997 law specified. In fact,
EEGSA even had excess capacity between 1997 and 2003 [4].

The support for renewable energy in Guatemala has a longer history than Latin
American countries. In 1986, a law promoting renewable energy was imple-
mented and stayed in effect until 2003. In 2003, the Guatemalan Congress
passed Law 52 for the Incentives of Renewable Energy Development [7]. This
law exempts the import tax on system parts, and generators do not have to pay
income tax on the project for the first ten years of operation. This renewable
energy law also changes some of the obligations of market players to allow
renewable generators to receive the best price for their electricity. In
Guatemala, retailers and distributors buy electricity from generators who sell
to small and large consumers. The law requires retailers to buy all energy from
renewable generators if those generators choose to sell it to the retailer.
Guatemala also has laws to promote cogeneration projects by prioritizing the
purchase of electricity from petroleum and bagasse burning facilities [8].
Guatemalan law recognizes the tremendous potential in small-scale
projects because of its many hydro and other renewable resources, which are
plentiful, but dispersed. These small inputs of new capacity also provide
manageable incremental new additions that do not overwhelm or flood the
market. Distributors previously worked with large customers while retailers
bought from smaller generators, but this new legislation allows projects above
5MW to sell to the distributor, not just retailers. Having the option to sell to
both of these entities allows the generator to get a more competitive price for
the electricity. There is also a benefit for applications under 5MW in that
operators do not have to apply for generation permits [9]. Prior to October
2007, projects that were less than 5MW could not connect to the grid. A new
law allows for inclusion of these applications by requiring distributors to
purchase renewable energy from small applications if they are available.
However, it is unclear who will actually pay for the line from the grid to the
GUATEMALA 233
point of generation since this law has not yet been tested and completely
formulated [10].
There are several laws that are being considered for future energy legisla-
tion. Currently, 79 per cent of the population, which uses less than 300kWh
per month, have energy prices subsidized. This high percentage of subsidized
energy prevents the Instituto Nacional de Electrificación from having money to
invest in transmission upgrades and extension. A proposal to lower the level at
which the subsidy applies to those who use less than 100kWh per month
would free up money for investments in transmission extension to reach
remote hydro sites [9].
There is a movement to charge for the right to use water for hydro
electricity. Currently, those who want to use water for hydro generation greater
than 5MW must request permission for the use of a certain altitude range of a
particular waterway from the Ministry of Energy and Mines, but do not pay
for the use of the water [11]. Those hydro projects under 5MW must register
for the water usage with the ministry [12].
CDM portfolio
10
9
8
Number of projects
7
6
5
4
3
2
1
0
methane methane
capture capture
Figure 20.1 Projects registered or in validation in Guatemala
Although there is not yet any wind development in Guatemala, an Israeli

engineering group called Tahal is studying the installation of a 45MW wind
power generation project in Guatemala. Other small developers are consider-
ing a 100MW site, called Piedras, and a 15MW site, called Buenos Aires, in the
southwest part of the country [13].
There is also movement to capture methane from hogs at Empacador
Toledo farms. These farms already have small cement digesters and want to
develop larger applications for their larger sites. They will use Ecoinvest to
complete the CDM process.

DNA office
Guatemala has a long Clean Development Mechanism (CDM) history, having
created an Office of Joint Implementation prior to the creation of the CDM in
1996. Its goal was to promote investments in emission reduction projects and
establish the requisite legal, political, technical and financial conditions for
accomplishment of this goal [6]. Now, the Designated National Authority
(DNA) office is located within MARN and consists only of the DNA and his
secretary [14]. A partnership of UNEP/Risø and a local NGO called Fundación
Solar initiated a study in 2005 to create a ‘fully operational CDM entity … a
set of clear and consistent rules … and a well-studied … and established
market of CDM projects’ [15].

In Guatemala, there are a variety of organizations that support renewable
energy. As a complement to its renewable energy incentives, the government’s
Ministerio de Energía y Minas has created an information centre for renewable
energy and a fund to support it. This centre created a guide for renewable
energy investors that included a CD-ROM with the laws related to renewable
energy, opportunities for its development, energy sector statistics and recom-
mendations [16].
A Cleaner Production Centre (Centro de Producción más Limpia), which is
supported by national and international organizations, aims to promote indus-
trial efficiency. It has a strong presence in Guatemala and has attempted to
become involved in CDM projects. The centre has two goals in Guatemala
with regard to CDM activities: it helps with capacity building and technical
assistance. Because of the centre’s mission, it is more involved in energy
efficiency and fuel switching rather than renewable energy projects, but it
could be a resource of interest for generators in the country who are looking
for an affordable CDM consultant. During 2006 and 2007, the Guatemalan
centre worked in developing three Project Idea Notes (PINs) for three different
companies representing three different industrial sectors. Due to various
factors, the process was stopped at the elaboration of the PINs, and Project
Design Documents (PDDs) were not prepared [17].
The Cleaner Production Centres are present in various countries of Latin
America, and they work as a network. From the centres the author visited, it can
be noted that the centre’s interest or active participation in activities related to
CDM depend on the country-specific conditions and opportunities. For
example, in Nicaragua, the centre has found that the CDM project cycle costs
are prohibitively high for involvement, in Guatemala it is actively pursuing
CDM projects, and the centre in Ecuador is not even aware of the CDM [18].
There is a regional office of the US-based National Rural Electric
Cooperative Association (NRECA), which has its Central American headquar-
ters in Guatemala City and also operates throughout the region and the
GUATEMALA 235
Caribbean. NRECA indirectly supports CDM efforts as it works with people

on how to get access to and use electricity, electricity companies to ensure
quality and cost of renewable energy, and generators to complete studies and
financial analyses [5].
In Guatemala, additional capacity development for CDM exists from the
Asociación de Generadores de Energía Renovable, a local trade association
that supports geothermal and hydro generation in the country. This entity gives
two seminars per year on the potential of CDM, but has more interest in the
voluntary market for selling emission reductions [19].
A local NGO, Fundación Solar, works with communities to bring electric-
ity and has taken an active role in promoting CDM by sponsoring studies and
giving presentations that explain carbon markets and Guatemala’s potential
for utilization of the CDM [10].
Carbon brokers
Within the country, there is a general lack of interest on the part of carbon
brokers to find projects because the size of industries in the country prevents
projects from covering the transaction costs of carbon brokers [19]. Ecoinvest
and Ecosecurities have both been involved in sugarmill projects [20]. Ecoinvest
is also involved in a biodigester project for the only hog operator in the country
that has a critical mass of hogs that is large enough to sustain an industrial size
digester. This hog farm operator, Empacador Toledo, chose to work with
Ecoinvest because they already had a relationship with Bungi, the larger group
that owns Ecoinvest and sells Toledo its hog feed. Another broker called Kyoto
Energy is helping INDESA palm company develop a methodology and register
a project that would use the palm fruit and wastewater as fertilizer instead of
letting this product anaerobically decompose and produce methane.

Guatemala has enormous hydro potential of 5000MW, but only has 558MW
installed. The geothermal potential is also huge and under-utilized at 767MW
and only 33MW installed. It has seven cogeneration projects with a total
capacity of 185.2MW [7]. There are 7800MW of wind that could be utilized
with only 0.1MW exploited [1]. The solar potential is 5–5.5kWh/m2/day [21].
Some areas of the region have moderate wind potential at 5.5–7m/s, but
overall there is not an excellent wind resource in the country [22].

There are several threats to the stability of the electrical sector in Guatemala
that provide an uncertain environment for potential investors. The General
Electricity Law can be changed at any time with just a simple congressional
majority vote. Likewise, the regulations and renewable energy incentives can
also be changed easily [23].
The institutions put in place since the market was privatized are weak. The
regulator CNEE and market manager AMM are vulnerable to pressures from
political offices. State-run INDE is also at risk of going into huge debt because
of the social tariff it must maintain. The law establishes a retail price cap of
8¢/kWh for customers who use less than 300kWh per month. Since 92 per cent
of Guatemalans fall into this category, a large subsidy is given. This subsidy is
derived from INDE’s hydro operations, which have small variable costs.
However, during dry seasons, INDE goes into debt as it must buy energy at
market prices and sell it at the subsidized rate. As rural electrification continues
and the number of users who benefit from this subsidized rate increases, INDE
will continue to suffer economically [4].
Another weak aspect of the Guatemalan energy sector is that the law
prohibiting vertical integration, which prevents the same company from
owning generation, transmission and distribution, is easily bypassed. By
forming a separate company to handle each separate market segment, the rule
against vertical integration can be easily avoided. In this way, new generators
entering the market are not immune to monopolistic tendencies and price
controls [4].
Beyond these regulatory barriers, Guatemala has a unique barrier to hydro
project implementation in that social resistance to projects is high [24]. The
root of today’s strong and often well-organized opposition to new hydro devel-
opment is a large 200MW hydro plant called Chixoy, which displaced many
people and failed to work with the community to successfully relocate individ-
uals. Controversy over both mining and hydro projects and the Guatemala
Civil War from the late 1960s until the 1990s led to a Peace Agreement of
1996, known as Consulta 179, that required developers to respect the rights of
all Guatemalan citizens and has the effect of making developers gain the
consent of the people in the area prior to commencement of development [25].
Developers see this law as a barrier and claim it has prevented three hydro
projects from being developed. However, they claim that a federal law also
exists that allows for the utilization of the resources in the region. The conflict
between the two laws becomes a jurisdiction problem and which law is
respected depends on who is interpreting it [5].
This Peace Agreement and the CDM requirement of having a stakeholder
meeting to assess the community support of the project have been key in block-
ing development. Rio Hondo I is a 4MW project, created in 1980, that failed to
benefit the community around it. As a result, when developers wanted to
expand this project from 4 to 30MW and earn CDM credit, the community
revolted [26]. The project was very far advanced with the PDD written, but it
failed to pass the national approval process and was blocked by the Peace
Agreement of 1996 because of the social strife it caused [15]. Now, investors
have money tied up in the project, but its development is at a standstill [27].
For the hydro project Tres Ríos, project developers got the requisite permits
and did an Environmental Impact Statement, but ultimately could not begin
generation because the community near the project was not in support of it [5].
Some project developers see NGOs like Guatemala City-based Madre
Selva as instigators of the community problems. Believing that these entities
GUATEMALA 237
support opposition to projects with the hope of a payout, developers contend

that the definition of a ‘stakeholder’ should be clearly defined in the CDM
comment process in order to prevent non-local forces like NGO groups from
abroad from influencing the process. They also contend that elected officials in
the area rally citizens and win elections on anti-hydro platforms. If these
officials change their position after they have been elected and see the benefits
the project could bring to the community, they face the prospect of being
accused of accepting bribes and fear violent attacks. Project engineers also
suffer from community attacks and have even been kidnapped. The complica-
tions that these social problems have caused have required developers to boost
the percentage of the project costs that go towards community integration of
the project from 1–2 per cent to 12 per cent [27].
These NGOs contend that private investors’ projects rarely benefit the
community and often take vital water away from it. These NGOs, such as
Fundación Solar and Madre Selva, are in support of hydro projects that are
owned by the municipality. The Chel project, which is owned by the municipal-
ity and required the labour of community participants in exchange for reduced
electricity rates, is a success story that electrified 440 homes [28 and 24].
Summary
Guatemala’s open marketplace with private investor participation seems to
provide a more favourable environment for investment than some of its neigh-
bouring countries, including Belize, Honduras and Mexico, which have more
closed markets. New renewable energy legislation that favours small-scale
projects may provide a unique advantage for these otherwise financially
questionable projects. However, social strife fuelled by poorly implemented
hydro and mining projects puts many of these projects in question.
References
1 Ministerio de Energía y Minas de Guatemala, Estadísticas Energéticas Subsector
Eléctrico, 2001–2007, http://www.mem.gob.gt/Portal/Documents/ImgLinks/
2008-09/392/INFORME%20ESTADISTICO%202007.pdf, accessed
12 March 2008
2 Hidroeléctrica Candelaria (2006) Candelaria Hydroelectric Project Design
Document, UNFCCC, 9 July
4 Fundación Solar and Rufin C. (2003) ‘Guatemala: Reforms in the balance’, in J.
Millán and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector
5 Arriaza, H. (2007) Interview with H. Arriaza, National Rural Electric
Cooperation (NRECA), 2 September, Guatemala City, Guatemala

Renewable Energy Forum in Bonn, Germany 29–31 May 2004, 19 May, available
8 Congreso de la Republica de Guatemala (2003) Decreto Numero 52-2003, 10
November, p3
10 Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Fundación Solar,
11 Castañeda, R. (2007) Interview with R. Castañeda, Designated National Authority
Mexico
13 Jongezoon, L. (2007) Interview with L. Jongezoon, Developer of Renewable
Energy Projects for Ecomina, SA, 6 September, Guatemala City, Guatemala
14 Casteñeda, R. (2007) Interview with R. Castañeda, Designated National Authority
15 UNEP/Risø Centre (2006) ‘CD4CDM Final Country Report: Outline’, 29
November, Fundación Solar Project
16 Ministerio de Energía y Minas de Guatemala y Tiempo de Solidaridad (n.d.) ‘Guia
del inversionista de la energía renovables y del subsector electrico’, available at
www.mem.gob.gt/Portal/Documents/ImgLinks/2008-09/350/Gu%C3%ADa%
20del%20Inversionista.pdf
17 Porta, M. A. (2007) Interview with M. A. Porta, Executive Director of El Centro de
Produccion Mas Limpia de Guatemala, 3 September, Guatemala City, Guatemala
18 Barahona, C. (2007) Interview with C. Barahona, Representative of Centro de
Producción Mas Limpia de Nicaragua, 17 September, Managua, Nicaragua
19 Escobar, C. (2007) Interview with C. Escobar, Director of Asociación de
Generadores de Energía Renovable (AGER), 5 September, Guatemala City,
Guatemala
20 Unda, V. (2007) Interview with V. Unda, Director of Ingenio Trinidad, 5
21 Solar and Wind Energy Resource Assessment (SWERA) (2003) ‘Solar: Annual
average global horizontal (GHI) map at 40km resolution for the Caribbean region
from NREL’, 11 December, United Nations Environment Programme, available at
http://swera.unep.net/index.php?id=metainfo&rowid=44&metaid=146
22 SWERA (2003) ‘Wind: Wind power density maps at 50m above ground and 1km
resolution for Central America from NREL’, United Nations Environment
Programme, available at http://swera.unep.net/index.php?id=metainfo&
rowid=44&metaid=146
23 Fundación Solar and Rufin C. (2003) ‘Guatemala: Reforms in the balance’, in
J. Millán and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector
GUATEMALA 239
24 Villaseñor, C. M. (2005) ‘Chel, a un paso de alcanzar su sueño’, Prensa Libre, 2

October, Guatemala City, Guatemala
25 United States Institute of Peace (1996) Acuerdo de Paz Firme y Duradera, Peace
Agreement, Government of Guatemala, Revolutionary National Unity of
Guatemala and United Nations, 29 December
26 Conde, O. (2007) Interview with O. Conde, Representative from Madre Selva, 6
27 Riviera, A. (2007) Interview with A. Riviera, CEO and President of Grupo Riviera,
28 US Agency for International Development (n.d.) Micro-Hydro Energy for Post
War Rehabilitation, Energy: Success Stories, available at
www.usaid.gov/our_work/economic_growth_and_trade/energy/publications/
success_stories/guatemala_riverofpeace.pdf
21
Honduras
Vital statistics
Portfolio mix: 57 per cent thermal; 36 per cent hydro; 33 per cent biomass [1]
Emission factor: 0.74 tonnes of CO2/MWh [2 and 3]
Existence of spot market: no; node prices used
Capacity payment: yes, for thermal generators. Prices set individually in each
contract and range from $11/kW to $19/kW [5]; none for renewables
Market manager: Empresa Nacional de Energía Eléctrica (ENEE)
Policy maker: Energy Cabinet [6]
Regulator: Comisión Nacional de la Energía (CNE)
Environmental permits: Dirección de Evaluación y Control Ambiental (DECA)
de Secretaria de Recursos Naturales y Ambiente (SERNA)
Generation permits: Dirección General de Energía (DGE) de SERNA

The state-run utility Empresa Nacional de Energía Eléctrica (ENEE) was
formed in 1957 to electrify the country. The 300MW Francisco Morazán
(commonly known as El Cajón) hydro project of 1985 expanded the grid’s
capacity by 144 per cent and halted new capacity additions in the early 1990s
as capacity far exceeded demand. However, a multi-year drought from 1990 to
1994 led to a dearth of energy and outages. Also, ENEE was in severe debt
from the El Cajón project [7].
As a result of these problems in the electrical sector, a sector reform was
supported by the World Bank and the Inter-American Development Bank in
1994 with a law (Ley Marco del Subsector Eléctrico – Decree 158-94) that
prevented the horizontal and vertical integration of electrical companies [7].
Prior to this law the only private generators that existed were small cogener-
ators that produced a total of 9MW, and only used the electricity produced
for their own use. ENEE was supposedly unbundled and partially privatized
by this legislation. Despite these laws, ENEE still handles most of the genera-
tion, transmission and distribution. By 1998, only three private generators
had entered the market, and there had been no interest in private transmis-
sion and distribution [8]. In 2002, 57.7 per cent of generation was privately
owned [9].
In private contracts, generators can sell to ENEE or large consumers in
Power Purchase Agreements (PPAs). However, to sell to a large customer, a
generator has to be appointed an ‘authorized entity’. ENEE authorized one
generator prior to Decree 158-94, but since then no generator has gained
authorization [10]. The price arranged in these PPAs must be the node price
established by the Comisión Nacional de la Energía (CNE) if the capacity
addition is offered by the generator, but not solicited by ENEE. If the capacity
addition is solicited by ENEE or sold to a third party, the price is more
negotiable. The node price is based on the short-run marginal generation cost
for five years into the future and includes transmission losses [10].
Generators can export energy to other countries only if national electricity
demands have been met [8]. In practice, this stipulation bars generators from
participating in the regional market since transactions do not take place
frequently, and it is difficult to estimate when there will be excess generation
[5]. The Executive Board of ENEE convenes to determine when energy
purchases from outside Honduran borders will be made. These decisions occur
so infrequently that they do not reflect the dynamic nature of the spot market;
instead, they are made based on the wet and dry seasons [5].
For capacity additions, ENEE must first solicit a request for generation.
Generators then compete on the basis of price. Capacity additions tend to be
chunky since ENEE has to buy 100 per cent of the generation from individual
generators for the developer to be able to secure a loan [5].
If unsolicited generation is offered, it can earn no more than the short-run
marginal system costs. If a price below the short-run marginal cost is offered,
ENEE must purchase the energy [8].
Even though Honduras was the first country to reform its electrical sector
in the Central American region, the law of 1994 did little to immediately trans-
form the energy sector. In 1998, energy-related organizations in the
government were reorganized to better facilitate privatization of the electrical
sector. In PPA contracts, the government has even assumed most of the project
risk in order to stimulate development [8].
Because inadequate capacity additions have been stimulated by the law of
1994, the government has signed last-minute contracts with private investors
for capacity additions. In these cases, formal rules for permit processes and
environmental impact studies are waived [7]. These additions tend to be from
thermal sources and the government pays more than the node price for genera-
tion [8]. This price, which was 9–11¢/kWh is subject to fluctuations based on
HONDURAS 243
fossil fuel prices. Also, it is not recovered in the tariff and leads to debt as the
government subsidizes this purchase [10].
The overall Honduran system is characterized by inefficiency. In 2005,
there were system losses of 24 per cent [4]. According to a study by the Inter-
American Development Bank, ‘Low worker productivity levels, overstaffing,
poor plant operating efficiencies, inadequate maintenance programs … poor
quality of service, power shortages, corruption, and poor management’ plague
the electrical sector [8]. Ironically, the country touts itself as providing Central
Americans with the cheapest form of electricity [5]. However, current prices are
only possible because 50 per cent of customers receive subsidies that are
putting ENEE in debt [10].

When Honduras privatized the electricity sector in 1994, the law prioritized
renewable generation in the national planning process. In the least-cost
planning process, an expansion plan that includes renewables can be selected
instead of one with conventional energy if the cost difference is less than 10 per
cent between the two [5].
Later, Decrees 85 and 267 provided the exoneration of income taxes on
renewable energy installations and exemption from income taxes for the first
five years of operation [11 and 12]. Decree 9 of 2001 guaranteed the state
purchase of renewable energy generation [13]. Then Decree 103 of 2003
eliminated administrative problems by streamlining issues like municipal
taxes.
In October 2007, Decree 70-2007 provided more targeted support for
renewables and tied some of the payments to US dollars instead of the local
currency, the lempira, in order to provide more economic certainty for develop-
ers. The major provisions of this law are provided below:
1 ENEE has to buy renewable energy from generators as long as the national
energy plan is not fulfilled. The price ENEE will pay is their avoided cost of
generation in the short term for five years plus 10 per cent for renewable
energy applications. Previously, ENEE only had to pay up to the avoided
cost. Now, that cost plus 10 per cent is the minimum they will pay.
Contracts for renewable energy have a 30-year life for hydro plants over
50MW [5]. The maximum inflation rate that will be applied is 1.5 per cent.
2 Transmission costs will be fixed at 1¢ USD/kWh instead of calculated by
distance and capacity of lines.
3 Systems under 3MW do not have to have a generating licence. Systems this
size are also exempt from doing a full Environmental Impact Statement
(EIS); instead, they can just fill out a form describing the environmental
impacts.
4 Renewable energy generators will be able to sell directly to the Central
American grid (SIEPAC) or large consumers.
5 Permits will be issued in a maximum of two months (60 working days).

The current process takes six months to two years. If permits cannot be
given in two months, the project will receive a waiver by the Law of
Simplified Administration (Ley de Simpificación Administrativa).
6 The water price for hydro installations will increase from 2 lempira per 1
horsepower to $0.1/kW installed for the first 15 years of operation and
$0.2/kW for each year thereafter [14].
CDM portfolio
10
9
8
Number of projects
7
6
5
4
3
2
1
0
methane methane
capture capture
Figure 21.1 Projects registered or in validation in Honduras
Honduras is home of the first small-scale CDM project in the world, a 13MW
hydro plant called Río Blanco. And this project and another small hydro in
Honduras called La Esperanza were the first projects to be issued Certified
Emission Reductions (CERs), which occurred in October 2005. This project
was an experiment of the World Bank [15]. Originally, Esperanza project
developers were working with the Finnish Industrial Development Fund
(FinFund) for the CDM negotiations and sale, but when the price of $1/CER
was offered, developers chose to go with the World Bank who gave $4.5/CER
and 30 per cent upfront for the project. This project, perhaps like some of the
other CDM small-scale hydro projects, was not financially additional. But,
because only one type of additionality barrier had to be broken as it is under
15MW, the project was able to prove itself because it was implemented in an
area of the country with few hydro installations and many political barriers
[16]. A variety of other hydro plants (Río Blanco, Cuyamapa, Cortecito and
San Carlos, La Esperanza, Cuyamel, La Gloria, CECECAPA, Yojoa and
Zacapa) were able to achieve registration. All of these plants are in 15-year
PPA with ENEE and are operated by private generators.
HONDURAS 245
Honduras hosts one biogas project from palm residues, which is a

relatively new and revolutionary project for the region. Only Colombia and
Guatemala have a prospective projects like this. Mesoamerica Energy is in the
advanced stages of developing a 60MW wind farm and hopes to earn CDM
revenues [17].

DNA office
The Designated National Authority (DNA) office for energy-related projects in
Honduras is housed in the Sub-Secretariat of Natural Resources and Energy (la
Subsecretaría de Recursos Naturales y Energía) of SERNA (Secretaría de
Recursos Naturales y Ambiente) and works separately from the Climate
Change Office in the National Directory of Energy. Forestry and transport
projects are being proposed to be housed in separate organizations. With the
change of presidents, most of the administrative staff of the DNA office and
the DNA himself were not rehired in 2005. In the autumn of 2007, the projects
being considered by this office were the same as those proposed up until
February 2005. While the new members of the office learned about CDM and
acquainted themselves with the country’s projects, there was a lack of produc-
tivity [5].
Former members of the DNA office partially attribute the success of
hosting the world’s first CDM project to the dedicated and energetic staff and
the country’s early streamlined procedures for project acceptance. The change
of administration stalled the headway made by this first team [5].
The current DNA and/or his assistant visit every proposed project to see if
it fulfils the country’s definition of sustainable development. These visits are
not always very informative since the project is often in the initial stages of
construction when it is applying for its national approval [18].

The government has begun to see the potential revenues associated with CDM
for its local industries. The Office of Special Projects within the Office of the
President of the Republic was created to explore the potential for biofuels by
giving support to palm producers to improve their cogeneration efficiency for
CDM credit. A governmental grant of $43 million was dedicated to help
project owners finance these projects [19]. Critics of the programme claim that
large companies with profitable projects should not need the government’s help
to capture CDM benefits; instead, small businesses should receive this atten-
tion [5].
Honduras also has the support of international organizations. The UN
Environment Programme and Fundación Bariloche completed a diagnostic of
the country’s policies for renewable energy and energy efficiency and assessed
the potential for renewable energy for the Programa de Desarrollo de Energía
Renovable in 2002 [19].
Carbon brokers
There is a local CDM broker headed by Suyapa Zelaya, who has been involved
in CDM negotiations for years in the country, called Fundación MDL.
Ecoinvest and Ecosecurities are well-known consultancies that handle many
projects in this area [10]. Project developers tend to trust them to handle the
CDM paperwork. The Asociación Hondureña de Pequeños Productores de
Energía Renovable (AHPPER) has helped write several of the PDDs for the
small-scale hydro projects in the country [15].

Honduras has enormous hydro potential with an estimated 4534MW of devel-
opable large and small hydro and only 466MW installed. Cogeneration of crop
biomass residue, including one African palm plant, only occurs at two factories,
with a total capacity of 59.8MW at the end of 2006 [5]. There is a potential of
120MW of geothermal capacity but utilization of this resource is limited by the
high costs of the drilling of holes [13].
There are a few excellent wind sites with wind speeds averaging 7–8m/s in
Honduras, but they are limited and the permits for these sites are already
spoken for as they are government concessions or owned by private compa-
nies. There are even better off-shore wind possibilities. The Solar and Wind
Energy Resource Assessment (SWERA) maps of the country highlighted these
prime wind development spots. The SWERA maps also show solar resource
potential of 5.5kW/m2/day [5].

Until 1994, about 99 per cent of Honduras’ grid was based on centralized
hydro. The recent thermal generation brought on quickly in a time of capacity
shortage to fulfil demand seemed ideal in the late 1990s when it was
contracted. At this time, fossil fuel prices were low and these plants required
little construction time.
This changing grid composition has had an impact on CDM projects.
When the first project was registered in 2005, the grid was 80 per cent hydro
and 20 per cent thermal from bunker fuel oil #6, which has a high level of
carbon emissions when burnt [5]. Now, the grid is closer to 70 per cent
thermal, and recently ENEE signed PPAs for 250MW of additional coal-based
generation, which will increase the number of CERs that can be expected from
CDM projects [1 and 5].
The way the Honduran grid is set up creates barriers as independent power
producers (IPPs) must accept the established node prices for generation [8].
The lack of a wholesale market that fluctuates takes away the potential for
generators to earn high payments during times of peak demand. Receiving a
stable node price, which was close to 7.2¢/kWh in the autumn of 2007, may be
favourable for intermittent generation that is often penalized in the payment
structure of other countries, but probably does not appeal to generators with
high operating costs, hoping for dispatch on command during the peak
HONDURAS 247
demand [5]. Renewable generators receive only this node price and no capacity
payment. The rules that provide preference for renewable generation dispatch
and a 10 per cent price premium are meant to put this type of generation
without capacity payments on a level playing field with thermal generation [7].
Even with these advantages, private renewable generators have difficulty
competing against ENEE since it benefits from preferential treatment in fuel,
municipal and sales taxes. When private generators attempt to sell to large
consumers in PPAs, they must pay fuel import taxes from which ENEE is
exempt [7].
As the government contracts small increments of thermal generation for
high prices way above the node price because of the capacity shortage, IPPs are
discouraged from entering the market, where they would have to accept a
much lower price than this contracted generation [6]. The PPAs that ENEE
offers IPPs tend to contain low prices for energy. This situation occurs because
the price ENEE can sell the electricity for is fixed by CNE. So, the only way for
ENEE to make money is to purchase or produce electricity more cheaply [5].
Also, thermal generators that are contracted for quick start-up by ENEE
receive a capacity payment that renewable generators must forgo [5].
Generators of the Honduran Association for Small Producers of
Renewable Energy (Asociación Hondureña de Pequeños Productores de
Energía Renovable (AHPPER)) have a lack of faith in ENEE and complain that
it could collapse. The transmission grid needs upgrades and has little supervi-
sion. After Hurricane Felix in August 2007, a transformer went down. There
was no recourse for energy generation while the needed replacement part was
ordered from Spain. Generators also complain that ENEE has the permits for
good hydro sites and is not selling or developing these sites. Thus, these sites
are not available for private generators [15].
If a private developer does procure a permit for a site, Honduran law
requires a developer with a permit to show construction progress every three
months. This law prevents companies from buying up permits, having no
intention of developing a project on the site, and then reselling the permits for
higher prices. However, it can also place pressure on developers to move along
quickly with construction. Clipper held a permit to develop a wind farm, but
was audited under this requirement and shown to not have made sufficient
movement on the project. It is possible that the development did not occur in a
timely fashion because Clipper, formally Enron, was undergoing an ownership
change. As a result, Clipper had the project permit taken away, and it was then
sold to Mesoamerica Energy, which is planning a 60MW farm [17].
Historically, getting permits for development has been a slow, arduous
task. It can take anywhere from three months to two years, depending on the
type of permit – that is, water or generation. The new renewable energy law
sets a time limit of a maximum of two months to process a permit. If the
process takes longer than that, then a waiver is issued and the project is exempt
from the permit process [14]. However, allowing the use of this waiver could
negate the project’s ability to receive CDM revenues since, according to the
CDM methodology, the project must assess the environmental impact of the
project and have all national permits.
The laws related to energy in Honduras can be confusing for developers
since they have changed over the years and had varying impacts on renewable
energy development. Up until 1998, renewable generation was obligated to
give 5 per cent of the tariffs it earns to reforestation projects [8]. Decreto 89-98
ended this rule. Prior to the renewable energy law of 2007, generators would
have to accept the node price or lower in PPAs with large consumers and
ENEE. Now, the node price is the lowest price that can be established in PPA
contracts [5]. In 2002, ENEE required 35 per cent of the CERs generated from
independently owned projects to be transferred to ENEE in its PPAs. In 2003
and 2004, ENEE made the decision to stop this practice and retroactively
change the PPAs they had signed to exclude this demand [10 and 5]. Keeping
up with these changes in rules is cumbersome and creates an unsure environ-
ment for investment.
Often, as is the case in other Latin American countries, hydro projects can
be troublesome. Getting land permits is complicated since people often live on
the land, but do not own it. Then, in order to create a project, developers have
to pay the owner for the rights to use the land, or buy it, and also pay for the
relocation of the people living on the land [5]. This upheaval is controversial as
the aforementioned governmental project of El Cajón, a 300MW ENEE
project built in 1985, displaced people, and now those living below the dam
are suffering from a lack of water [15].
The legacy of these dams has led to hydro resistance and the practice of
local villages extorting developers with financial demands. Greenpeace and the
Sierra Club have partnered with communities to prevent large hydro projects.
Developers claim that even the environmental department at the US Embassy
was against hydro development [16].
Both La Babilonia and El Coronado, two prospective small-scale CDM
projects, faced the difficulty of complicated community relations. Babilonia also
faced challenges from environmentalists since it was located in the buffer zone
of a protected area [20]. Poor community relations prevented Pico Bonito, a
forestry project, from earning CERs [18]. The difficulty of implementing hydro
projects has led developers to prefer very small-scale hydro projects as they insti-
gate less controversy and resistance [16]. Beyond requiring bribes, the social
environment in parts of Honduras can sometimes complicate projects since it is
not safe for engineers to travel and work without armed bodyguards [20].
Summary
Honduras made an early move to privatize the electrical sector, but the way the
rules were set for IPPs was not advantageous. The contracts that ENEE can
negotiate with IPPs are controlled and have few advantages for private genera-
tors. This situation, combined with ENEE’s poor management of the electrical
sector and general country risk for CDM development, has been a barrier to
HONDURAS 249
private investment. Despite these challenges, small hydro development has

enjoyed moderate success because of the country’s plentiful resources, the
favourable economics of these projects without CDM revenues, and an
energetic original DNA office team. The new renewable energy incentives of
2007 may open up the country to new and more varied CDM development.
References
Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/
extra/html/pdf/library/olade.pdf
2 Zacapa (2005) Zacapa Mini Hydro Project Design Document, UNFCCC,
28 November
3 Aceitera General Deheza (2007) Bio energy in General Deheza – Electricity genera-
tion based on peanut hull and sunflower husk Project Design Document,
UNFCCC, 10 February
Honduras
6 Millán, J. (1999) ‘The power sector in: Honduras’, in Profiles of Power Sector
7 Walker, I. and Benavides, J. (2003) ‘Honduras: The road to sustainable reform’, in
J. Millán and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector
8 Millan, J. (1999) ‘The power sector in: Nicaragua’, in Profiles of Power Sector
9 AHPPER (Asociación Hondureña de Pequeños Productores de Electricidad
Renovable) (2004) Rio Blanco Project Design Document, UNFCCC , 4 November
10 Castillo, G. (2007) Interview with G. Castillo, Jefa de Desarrollo Sostenible de
ENEE, 14 September, Tegucigalpa, Honduras
11 Comision Nacional de Energía (1999) Decreto 85-98, in La Gaceta: Diario Oficial
de La Republica de Honduras, 1 February, Tegucigalpa, Honduras
12 Comision Nacional de Energía (1998) Decreto 267-98, in La Gaceta: Diario
Oficial de La Republica de Honduras, 5 December, Tegucigalpa, Honduras
Renewable Energy Forum in Bonn, Germany, 29–31 May 2004, 19 May, available
14 Comision Nacional de Energía (2007) Decreto 70-2007, in La Gaceta: Diario
Oficial de La Republica de Honduras, 2 October, Tegucigalpa, Honduras
15 Cardona, E. Z. (2007) Interview with E. Z. Cardona, Gerente General de Colegio
de Ingenicios Mecánicos Electricistas y Químicas (former director of AHPPER), 10
September, Tegucigalpa, Honduras
16 Paz, E. (2007) Interview with E. Paz, AHPPER Coordinator and CEO of

INVERSA, 14 September, Tegucigalpa, Honduras
18 Aleman, O. (2007) Interview with O. Aleman, DNA Office, 12 September,
Tegucigalpa, Honduras
19 Starkman, M. (2007) Interview with M. Starkman, Asesor de Proyectos Especiales
de Presidencia de la Republica, 11 September, Tegucigalpa, Honduras
20 Bueso, C. (2007) Interview with C. Bueso, Coronado Hydro Site Engineer for
22
Mexico
1
Vital statistics
Portfolio mix (by installed capacity): 77 per cent fossil fuels; 14 per cent hydro;
4.5 per cent nuclear; 3 per cent geothermal; 0.01 per cent wind [1]
Average price of electricity: 8.48¢/kWh residential; 8.8¢/kWh industrial
Privatized electricity market: partially
Capacity payment: no, and renewable generators must pay CFE a firming
charge for supporting their generation [3]
Regulator: Comisión Reguladora de Energía (CRE)
Policy maker and future planning: Secretaría de Energía (SENER)
Environmental permits: Secretaría del Medio Ambiente y Recursos Naturales
(SEMARNAT)
Energy efficiency agency: Comisión Nacional para el Ahorro de Energía
(CONAE)

In Mexico, the electrical sector is primarily still publicly owned by the two
state-run companies, Comisión Federal de Electricidad (CFE) and Luz y Fuerza
del Centro. Luz y Fuerza owns just 1.3 per cent of Mexican generation and
serves Mexico City and parts of the surrounding provinces with distribution
[4]. Therefore, CFE with 80.3 per cent of Mexican generation is the main
governmentally owned and operated company that serves the country [5].
Within CFE’s portfolio, large hydro makes up 11 per cent of its total genera-
tion because hydro is used only for peak demand load instead of for baseload
generation. The other non-carbon-intensive fuels, making up a small portion of
the total generation portfolio, are geothermal 3 per cent, nuclear 4.5 per cent
and wind 0.01 per cent [6]. Attributing 81 per cent of its generation to fossil
fuels, Mexico’s national emission factor is relatively high at an average of 0.6
tonnes of CO2 emitted for each megawatt-hour of electricity generated [7].

Other countries with more dependence on hydro resources, like Costa Rica,
have emission factors closer to 0.15 tonnes of CO2 per MWh [8]. Therefore,
substituting renewable energy for conventional energy in Mexico has the
ability to earn a significant number of emission reductions.
The few independent power producers (IPPs) that exist have fought against
permit issues and a culture that supports the state-run monopoly. Transmission
tariffs and the self-supplier scheme that IPPs must use have stifled the market.
These issues will be described in detail in the section that addresses ‘Unique
experiences and situations’ in Mexico.

Laws passed since 1992 tried to create a more favourable regulatory frame-
work for renewable energy, but succeeded at enticing relatively few IPPs to
enter the market. Five different schemes under the 1992 Electric Energy Public
Service Law (Ley de Servicio Público de Energía Eléctrica) allow IPPs to exist
[9]. These schemes include the following:
1 On-site generation or cogeneration for use at a factory’s facilities to

decrease or eliminate external electricity demand.
2 IPP generation for sale to CFE at 85 per cent of CFE’s avoided cost of
generation. (Note: in the case of renewables, the sale is for 85 per cent of
avoided costs; in the case of firm power, it is 95 per cent.)
3 Cogeneration or small amounts of energy generation for export. This
option, known as the self-supply scheme, allows one to sell this electricity
to an off-taker; however, the off-taker must own at least 1 per cent of the
company’s operations. Only shareholders in the generator’s company can
buy the generated amount. The price of generation is negotiated by the
shareholder and the electricity generator. In order to entice shareholders to
buy generation, the price generators offer is usually slightly less than CFE’s
rates. In addition to these complexities and sale of electricity for less than
CFE’s rates, the generator has to pay CFE wheeling (transmitting and
distributing) and ancillary services charges for using transmission infra-
structure.
4 Imported energy to be used at one specific location. The law allows energy
to be generated on site when the public grid is interrupted.
While the 1992 Electric Energy Public Service Law allowed IPPs to enter the
electrical sector, it did not provide any specific incentives for renewable genera-
tion and therefore stimulated little development in this sector since renewables
were comparatively more expensive than conventional sources of energy. The
Mexican Energy Regulatory Commission approved several regulations from
2001 to 2006 that included service charges and contract models for renewable
energy transmission in order to stimulate growth in this sector. These regula-
tions contain the following rules:
MEXICO 253
1 The self-supply scheme, which has proven to be the most economically

viable option for IPPs of conventional and renewable energy under the
1992 legislation, allows for the summing of the total amount of energy
(kWh) produced over a month. Then, this amount of energy is compared
with the energy demand that the off-taker shareholder recorded over the
month. Surplus energy produced by the generator can be banked on a
month-to-month basis, allowing this extra energy to be allocated to the off-
taker in months where production is lower than consumption. Having this
longer window of time to ‘bank’ kWh produced allows renewable genera-
tors to more closely match the load of their off-takers. Wind developers
usually size their plants to produce a total annual amount of energy equal
to their off-taker’s demand and the resource available at the site. Given that
some months are windier than others, there will be a given number of
months in which energy production will exceed energy consumption of the
off-taker and vice versa. This ‘bankability’ option benefits renewable
energy, effectively helping to compensate for wind’s variable performance.
If there is excess energy over the course of several months, the renewable
generator is paid at 85 per cent of CFE’s avoided costs for the extra energy
placed on the grid. If there is a dearth of electricity generated over the
period, the self-supply company pays CFE a penalty for the number of
kWh it is short in supplying its off-takers demand. Energy generated at
peak demand is considered three to four times more valuable than energy
at other times [3].
2 Renewable generators may take advantage of accelerated depreciation on
profits or other investments they may have [10]. If a generator has no other
profits or investments, this advantage does not apply.
3 Capacity charges for transmission are tailored for renewable energy as they
are based on the average capacity of the generator at the interconnection
point [11]. Since renewable energy like wind and solar can have a capacity
factor of about 25 per cent, as compared with the typical capacity factor of
a fossil fuel-burning power plant of 85 per cent, this type of advantageous
transmission structure is significant.
Some local firms, such as COMEXHIDRO and Fuerza Eólica, entered the
Mexican market after these regulations were passed. However, these small and
medium-sized companies found that not all of the regulations were very benefi-
cial. Fledgling companies with few other investments and no profits quickly
discovered that the accelerated depreciation law only benefits established
companies. Until a new generator begins earning profits, which can take up to
ten years with a hydro project, accelerated depreciation is meaningless.
The failure of the 1992 Electric Energy Public Service Law and subsequent
regulations to stimulate much renewable energy development in the private
sector led the Chamber of Deputies to approve the Law for Utilization of
Renewable Energy (Ley para el Aprovechamiento de las Fuentes Renovables de
Energía (LAFRE)) in December 2005 [12]. LAFRE has been debated in
Congress since its passage as a bill, but as of September 2007 was predicted to
be signed as a law soon. The bill would significantly increase the benefits for
renewable energy, defined as wind, solar, hydro, tidal, wave, ocean thermal,
solar pond, biomass and geothermal generation. The following benefits would
apply to these technologies under this proposed law:
1 The Mexican government, as well as private companies, would assume

responsibility for new renewable energy installations. CFE would be able
to incorporate renewable energy into its future generation plans by allow-
ing the long-term benefits of renewable energy like stable fuel costs to be
incorporated into the least-cost bidding process for this energy.
2 How much renewable energy should be installed and how to achieve these
goals will be described. Small projects, defined as projects under 30MW,
and a diversity of technologies, instead of just the least-cost type of renew-
able generation, are prioritized in these goals.
3 A committee will be established to create incentives for local manufactur-
ing of renewable energy equipment.
4 Land with excellent renewable energy resources for future development
will be preserved through the creation of programmes to achieve this goal.
5 A $55 million trust to promote renewable energy will be established by a
new financial committee [13]. This trust’s funds will support the following:
55 per cent will cover a ‘green fund’ to allow the cost of generation of
renewable energy to be competitive with conventional energy; 6 per cent
will be allocated to emerging technologies; 10 per cent for rural electrifica-
tion; 7 per cent for a general fund for renewable energy; 7 per cent for
biofuels; and 15 per cent for research and development of technologies.
This financial committee will also negotiate CER sales that result from new
renewable energy applications that achieve CDM registration.
6 Renewable energy will benefit from first and immediate dispatch.
7 Expedited permit and generation procedures will apply for projects under
0.5MW.
8 If greater than 2.5MW, projects will have to take into account how they
affect nearby communities. Hydro greater than 30MW and wind greater
than 60MW will have to take special precautions to ensure that they do
not detrimentally impact locals, as a committee will be formed to ensure
that these projects are developed in a sustainable way and that developers
have all of the requisite permits [12].
While LAFRE seems to put in place key elements for successful renewable
energy development, it is uncertain whether it will do enough to stimulate
growth in the renewables sector in Mexico. The first goal of LAFRE allows the
long-term benefits of renewable energy to be considered for CFE’s least-cost
bid process, but it does not specify whether or not potential CDM revenues can
be considered in this bid process to make renewable energy more cost-competi-
tive. (This point will be described in more detail in the subsequent section of
MEXICO 255
this chapter.) Without incorporation of CDM revenues, the other benefits of

renewable energy, such as stable or no fuel costs, will be unlikely on their own
to be significant enough to allow renewables to compete with conventional
energy. Therefore without incorporation of CDM revenues, renewables may
not be able to be shown as the least-cost option and be selected for develop-
ment by CFE, which is bound by law to develop the least-cost option.
Ironically, the second part of this law, which provides the renewable energy
goals, may make it difficult for projects to earn CDM revenues. Specifically,
one draft of LAFRE proposes requiring 12 per cent of Mexico’s energy capacity
to come from renewable resources that do not include hydro over 30MW by
2012 [13]. This goal, and attendant money dedicated to achieving it, could
cause renewable energy to be deemed ‘business-as-usual’ by the CDM
Registration and Issuance Team and put into question the future financial and
regulatory additionality of renewable energy projects. Real world examples of
how LAFRE changes the economics of renewable energy projects and the
ability of projects to achieve CDM registration will be the only way to evaluate
its impact.
CDM portfolio
40
35
30
Number of projects
25
20
15
10
0
methane methane
capture capture
Figure 22.1 Projects registered or in validation in Mexico
The CDM landscape in Mexico as of April 2008 was dominated by methane

capture from hog farms, which, when fully operational, will produce 49 per
cent of the emission reductions and constitute 92 per cent of the projects in the
country [14]. There is room for more development in other hog farms, slaugh-
terhouses and dairy farms, but recent difficulties with the operations of the
existing digesters place the economic viability and carbon consultant interest in
developing these projects in the future in question [15]. Installed digesters have
produced fewer Certified Emission Reductions (CERs) than expected because
of problems controlling the temperature, pH and quantity of chemicals and

antibiotics in the manure. Also, improperly installed cables to ignite pilot lights
have reduced the number of CERs generated as flares do not always stay lit, as
is explained in more detail in Chapter 2, ‘Technical Barriers’. A recent change
in the CDM methodology used for these projects has reduced the number of
CERs that could be created and increased project costs, making them less
attractive to developers [16]. This methodology change is explained in more
detail in Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’. Some
of these projects hope to generate electricity from the methane, but it is unclear
how much can be produced because of the unexpectedly low levels of methane
currently being harvested [15].
Methane capture and use for electricity from landfills is being actively
pursued by several landfills, with the support of the Social Development
Secretariat (SEDESOL) as a part of its mission to improve the municipal solid
waste management. Its support of a project in Monterrey, which is registered
under the CDM, helped create a prototype plant that can be replicated by other
municipal governments [17].
The wind sector is well developed in Mexico with a series of projects in
Baja California and Oaxaca underway. These projects will be elaborated upon
in the following section. Also, several irrigation dams are being retrofitted to
generate electricity by COMEXHIDRO [18].
There is interest in registering future geothermal projects like Cerro Pieto,
but these projects may have difficulty proving additionality since Mexico, with
3 per cent of the country’s generation sourced from geothermal plants, is
already a leader in the region for this type of generation and there would be no
first-of-a-kind barriers to break. Also, the project would not be able to show
financial additionality since geothermal energy is currently cheaper than the
diesel or natural gas alternatives for the country [19].
Other types of CDM projects, such as energy efficiency, forestry and trans-
portation, do exist in isolated cases, but evolving methodologies in the forestry
and transportation sectors and the lack of an economically viable model for
energy efficiency projects create barriers for the development of these projects
[20].

DNA office
The Mexican Designated National Authority (DNA) office is located within
SEMARNAT, a huge governmental entity dedicated to the environment and
natural resources. Given Mexico’s large regional presence in CDM activity and
potential for more, the DNA office is severely understaffed with just two
people dedicated to the CDM process in August 2007. This situation leaves the
country with few people to field questions and direct promotion activities.
Despite this situation, the office does have a fairly well-developed webpage that
can serve as a guide for developers [21].
MEXICO 257

Since 1990, renewable energy efforts of the government have been promoted
mainly through the National Commission on Energy Conservation (CONAE).
There is also a nationally sponsored Electrical Research Institute (IIE) that has
a renewable energy division. The Social Development Secretariat (SEDESOL)
promotes landfill-gas-to-energy technologies in landfill projects throughout the
country and used a prototype project in Monterrey to kick-start projects [17].
Recently, during the summer of 2007, a Mexican Carbon Fund
(FOMECAR) was created. This fund got its start towards beginning of
President Felipe Calderon’s administration in the autumn of 2006 and has taken
several months to gain momentum. The fund is located within Banco Nacional
del Comercio Exterior (Bancomext) and does not have a staff that is dedicated
solely to its functioning. Therefore, it can sometimes take a backseat to other,
more pressing business. However, it has a healthy budget of $350 million to
start its operations, which consist of helping to develop CDM projects by
providing initial support to project developers unfamiliar with the process and
hosting seminars on the topic [22]. The portion of FOMECAR that promotes
new technologies through seminars and other public outreach will be covered
by the grants. Another arm of FOMECAR hopes to sustain itself and perhaps
even make a small profit by taking a percentage of the CERs from the Project
Design Documents (PDDs) it develops. FOMECAR differs from other carbon
consultancies who charge a percentage of CERs for their work in that it strives
to set a reasonable price or deduct CERs for services payment [23].
Another type of institutional support in Mexico called CESPEDES (Centro
de Estudios del Sector Privado para el Desarrollo Sustentable) tries to encour-
age private sector participation in projects. However, to this point CESPEDES
has focused mainly on energy efficiency and combined heat and power projects
[24].
Carbon brokers
Ecosecurities and AgCert both have offices in Mexico City and tend to
dominate the market for agro-industry and landfill gas capture projects [15].
Econergy International also has an office in Monterrey and has developed a
small-scale energy efficiency project [25]. The World Bank helped develop a
landfill project in Monterrey. Estudios y Técnicos Especializados en Ingeniera
(ETEISA), a local company, has provided consulting services on landfill gas
capture and is now beginning to be interested in developing these projects for
CERs [20].

Mexico is replete with renewable energy resources with ~33,200MW of
optimal wind resource in Oaxaca, as well as excellent wind in Baja California
and the Yucatan Peninsula, and 3300MW of small hydro throughout the
country [10]. Many parts of Mexico have been mapped and studied for wind
potential. A detailed wind map of the state of Oaxaca was completed by the
National Renewable Energy Laboratory (NREL) and shows average wind

speeds to be in the excellent category of 7.5 to 8m/s. NREL also has a map for
the northwestern border area that shows fair to good resources (6.4 to 7.5m/s)
on the eastern coast of Baja California [26]. The average estimated solar radia-
tion in the country is 5kWh/m2 per day. The biomass potential is predicted to
be 1000MW from sugarcane residue and 150MW from municipal solid waste
[27]. Altogether, the Regulatory Energy Commission in Mexico has given out
permits for 1076MW of wind development in Oaxaca and Baja and 40MW of
permits for biomass self-supply generation at paper and sugarmills, landfills,
and farms that plan to use cow manure [28].

A study that analysed Mexico’s potential to generate CERs based on its GDP
shows that it is producing 5 million fewer CERs than expected while Brazil is
producing over 6 million more than expected [29]. Mexico’s CDM potential
emanates from its densely populated cities, especially the capital with an
estimated 23–30 million inhabitants, and relatively advanced economy, which
creates many opportunities for emission reductions across all sectors, from
industrial gas efficiency to landfill gas capture and energy efficiency improve-
ments [20]. And, as previously mentioned, Mexico’s plentiful natural resources
make the country ideal for CDM development for renewable energy in particu-
lar. Despite the relatively large number of permits for renewable generation
that have been distributed (as mentioned in the previous section), renewable
energy developers face substantial hurdles that may prevent the abundant
Mexican renewable resources from being harnessed for electrical generation.
Renewable energy makes up half of the world’s portfolio of emission reduction
projects, but in Mexico it makes up only 4.5 per cent of the registered and
pipeline projects [30].
The underperformance of renewable energy in Mexico stems mainly from
the CFE’s control of most of the country’s power generation and transmission.
CFE not only has a culture that does not embrace new types of generation but
also is thwarted by regulatory barriers. CFE cannot build renewable energy
projects because the levelized or average cost of the energy over the lifetime of
the plant of non-hydro renewable energy in the country is more expensive than
conventional energy. CFE is bound by federal law to develop new capacity
additions that will provide the cheapest electricity for citizens. Even with the
regulations of 2001 to 2006 that provide some benefits to renewable energy,
there are currently no regulatory mandates like domestic renewable energy
targets or financial incentives like feed-in tariffs or production tax credits to
make this type of generation competitive with fossil fuel-based generation.
Also, in the planning process for new capacity additions, there is no incorpora-
tion of a future carbon tax or CDM revenues, which would make renewables
more competitive with conventional energy [3].
Part of the Mexican government’s reasoning for not allowing the CER
revenues to be incorporated into the least-cost planning process could be that
MEXICO 259
these revenues are not guaranteed; they are susceptible to the risk that the
project will not be registered and that there will be no value for CERs post-
2012. If a project that relies on CERs for economic viability is built, then it
could in the future depend upon the Mexican government for this money if the
CER revenue is not delivered.
Also, the rigid structure of CFE currently has no way to deal with CER
revenues. They, most likely, could not be brought into the CFE budget since
the company’s profits are regulated and determined by a tariff calculation.
Therefore, the money would probably go to the Mexican government.
Consequently, CFE has no direct financial incentive to pursue CDM revenues
[19].
If a project does not pass the financial analysis and get selected as the least-
cost technology, then it is not published in the long-term planning process
document called the Prospectiva del Sector Eléctrico that is presented before
Congress and passed yearly. Capacity additions that are not in this document
will not be considered for CFE development. However, if renewable energy is
found to be the least-cost option and published in the long-term planning
document, then this renewable energy would most likely not qualify for CDM
revenues because it would fail both financial and regulatory additionality tests,
which require that the project cause emission reductions beyond what would
have occurred in a business-as-usual scenario [3].
Because of the least-cost planning process, there have been only two renew-
able energy projects owned by CFE that attempted to achieve CDM
registration. The first of these projects, known as La Venta II, with a capacity of
83MW and located in the state of Oaxaca, is an anomaly in CFE’s portfolio. It is
unclear how CFE was able to pass this project through the least-cost planning
process since it was financed as a public works project and only received $3
million of upfront capital from the World Bank for the sale of the CERs that will
be generated by the project [31]. Another CFE project that is hoping to earn
CERs is a 100MW wind project in Oaxaca, known as La Venta III, which is
being supported by the World Bank’s Global Environmental Fund output based
grant for $25 million and a project reliability and technology research grant for
$45 million. To avoid negating financial additionality for the CDM revenues,
the World Bank claims that CERs or money given to the project by a newly
established Mexican Green Fund will go back into the Green Fund instead of to
the project owners. The large grant that this project is receiving may, however,
make it impossible to show financial additionality and earn CERs [10].
CFE plans on developing La Venta IV, V, VI and VII with a total installed
capacity of 405MW, but without the upfront capital provided by the World
Bank that will later be paid back in part by the CERs generated by the project,
these wind farms will not be financially competitive with other generation
during the bidding process and will not be chosen for development. CFE is also
planning on developing a 280MW thermal plant that will use 30MW of solar
energy to supplement the project, with the help of a $50 million grant from the
World Bank’s Global Environmental Fund [29].
The lack of transparency in CFE’s accounting and planning process makes

it hard to understand why La Venta II was able to succeed in passing the least-
cost financial analysis and proving regulatory additionality by being listed in
the planned capacity additions. La Venta III is obviously a special case and will
be able to exist because of the World Bank’s production tax credit and research
funds. However, the ability of La Venta III to earn CERs is highly doubtful
because of this World Bank grant. The continued development of renewable
energy through CFE will most likely be a slow process as it relies on grants or
low-interest loans to successfully compete in the least-cost bid process and has
the additional hurdle of demonstrating regulatory additionality.
Because of these barriers for CDM participation from the state-run genera-
tion company, privately owned generation comprises the sector with the most
potential for utilization of the CDM. The mere fact that private generation
makes up only 17.73 per cent of the country’s portfolio limits the number of
projects that can be developed [32]. And a multitude of barriers to renewable
energy development in Mexico for IPPs have also caused this market to move
slowly.
For an IPP to begin generating electricity over 0.5MW in Mexico, the
company must not only apply for a generation permit, but also obtain the more
difficult land and/or water leases for the site of generation. Because there are
few land deeds that show legal ownership of property, IPPs sometimes have to
go through an arduous process of having the local inhabitants first apply for
their land deed before the IPP can legally lease it. Some companies have had the
experience of purchasing land from the legal owner and later finding that
people are living illegally on the land but claim it as their own. Relocating these
people has been problematic and time-consuming [18]. Siting a project that is
near a surrounding community can also be a difficult process. COMEX-
HIDRO had to convince locals that the power plant they planned on building
near farmers’ fields would not ‘electrify crops’ with its electricity and that the
dam would not take any water away from the irrigation efforts. At the
proposed Benito Juarez COMEXHIDRO site in Oaxaca, locals are barring the
construction of the dam because they think preventing the project will provide
them with the leveraging power to oust the current governor of Oaxaca [18].
Fuerza Eólica contracted a person to act as a community liaison in Baja
California to handle the land leasing and community relations only to find that
he was working for another company and started a land bidding war that
raised the price of the land for wind project development. In general, project
developers have found that locals, officials and even ornithologists, who study
the impact wind turbines could have on birds and bats, often demand illegal
payouts in order to allow the project to be completed [33].
The following stage in the process for the IPP to begin operations is for it to
negotiate a price for transmission and firming capacity with CFE. The trans-
mission charge is what CFE charges the IPP to use the excess capacity on the
lines and the firming charge is the amount billed to provide backup energy for
the investors in case what they use is more than the renewable generator
MEXICO 261
produces over a monthly period. The tariffs charged by CFE constitute 15–30
per cent of the price per kWh that the customer eventually pays to the IPP [33
and 18]. For the area of Oaxaca where the current grid cannot support the
large wind applications in the area, IPPs must pay a portion of the cost for CFE
to create a new 230kV transmission line from Oaxaca to an area of intercon-
nection [34].
The next stage of the process requires the IPP to complete a Power
Purchase Agreement (PPA) under one of the five schemes provided by the 1992
Electric Energy Public Service Law (Ley de Servicio Público de Energía
Eléctrica). Most renewable generators opt for the self-supply scheme, which
entails an agreement between project investors and the IPP. Investors must
purchase at least one share of the generating company and then sign a long-
term PPA [34]. In most cases, the price offered by the IPP must be less than that
which investors currently pay CFE to be competitive. However, to some project
owners in energy-intensive sectors, a long-term, fixed electricity price is attrac-
tive as it acts as a hedge against upward fluctuations in hydrocarbon markets.
Then the IPP is allowed to feed the amount of electricity into the grid that their
customers use. If more energy is produced than the investors can use, then CFE
buys the electricity from the IPP at 85 per cent of CFE’s avoided costs. If less
electricity is produced than determined by the initial capacity calculation, then
higher capacity charges can apply in the next contract between CFE and the
IPP. An Environmental Impact Statement assessing the potential environmental
ramifications of the project must be prepared, and usually costs several
thousand dollars. Only after all of these hurdles have been overcome can the
project begin to consider applying for CDM revenues and undergo the lengthy
CDM process.
Of the five available options given in the 1992 Electric Energy Public
Service Law, IPPs are most interested in the self-supply scheme. This scheme
can be the most lucrative since the average price of electricity in Mexico, for
the industrial and commercial sectors that independent producers sell to is high
at 13.04¢/kWh [35], and wind energy in a place like Oaxaca with a 50 per cent
capacity factor [3] can be generated for 4–6¢/kWh [36]. However, all of these
steps involved in the process cause delays that are too lengthy for most small,
fledgling generation companies to endure. Therefore, in the state of Oaxaca,
large companies dominate the landscape for project development and there are
few small companies that have made movements to develop resources.
Iberdrola was involved in the bidding process for constructing La Venta III
for CFE’s operations, but their bid for generation at 4.6¢/kWh was rejected by
CFE as being too high [37]. Deproe, partnered with Electricité de France, is
pursuing a 67.5MW site. And Gamesa has a bid for a 200MW wind farm
called Bii Nee Stipa that it will develop jointly with local Cableados
Industriales [38]. Also, Eurus, a wind division of CEMEX Mexico, has a bid
for a 250MW farm [39]. Econergy International is interested in developing a
20MW wind farm at a sustainable resort community in Baja [40]. A local firm
called Guascor has shown interest in developing projects in Oaxaca, but the
only small-sized company with a serious bid is Fuerza Eólica [41]. This
Mexican company hopes to develop a 100MW self-supply wind project in
Oaxaca, a 10MW self-supply wind project in Baja California for the state
government and a 300MW export wind project in Baja California to serve
California’s renewable energy demand. The company has invested 15 years in
their development. If Fuerza Eólica did not have a manufacturing arm that
makes Clipper turbines, it would not be able to finance its operations solely via
its development arm because of the long, arduous process it has undergone to
get projects initiated [33].
One other small Mexican IPP, COMEXHIDRO, has pioneered the way for
small hydro development in the country. COMEXHIDRO has existed since
2003 and also encountered problems advancing projects. Their business model
of retrofitting already existing irrigation dams for electrical production has cut
project costs and some permit headaches [18]. Other than these two domestic
firms, there is little activity in the field to develop new projects. The $7 billion
of governmental subsidies that the state-run CFE and Companía Nacional de
Fuerza y Luz receive every year also makes it hard for private companies to
compete with electrical generation [34].
Summary
Given Mexico’s GDP and potential for emission reduction projects, there is the
possibility for substantial growth in the field of CDM projects. However,
recent difficulties with Mexico’s methane capture projects and a lack of invest-
ment in transport and industrial efficiency projects do not portend a robust
future in these sectors. Therefore, renewable energy is the most likely sector to
take advantage of CDM revenues given demand growth in electricity and the
significant obstacles to project development in other sectors. However, the
state-run company that controls the bulk of the generation market, CFE,
cannot invest in CDM renewable energy projects because of limitations on
investment. Private companies face significant barriers because the Mexican
market is still not completely privatized.
The 1992 Electric Energy Public Service Power Law, promoting an open
energy market, and the 2001 and 2006 regulation changes did not do enough
to support the industry. Although the market was open, numerous barriers
such as expensive transmission tariffs and size restraints prevented the private
sector from competing with the CFE. Companies such as Fuerza Eólica and
COMEXHIDRO struggled to obtain all of the necessary permits and conces-
sions to begin operations since they were first-of-a-kind operations. However,
their persistence has helped pave the way for development in the country. Also,
the market could improve as significant 2007 laws favouring renewable energy
become implemented. Time and market interest will show whether or not the
renewable energy legislation is adequate to prompt development.
MEXICO 263
Note
1 Much of the content in this chapter is revised from an article by the author entitled
‘Barriers to clean development mechanism renewable energy projects in Mexico’,
published by the author in Elsevier’s Renewable Energy in July of 2008.
References
1 Secretaría de Energía (SENER) ‘Generación bruta’,
www.energia.gob.mx/webSener/portal/index.jsp?id=71, accessed 12 October 2007
2 Iberdrola (2007) La Ventosa Project Design Document, UNFCCC, 14 June
4 Luz y Fuerza del Centro, ‘Capacidad’, www.lfc.gob.mx/capacidad.htm, accessed
20 October 2007
5 COMEXHIDRO (2007) Chilatán Project Design Document, UNFCCC, 29 May
6 Secretario de Energía de México, ‘Sector nacional de energía: Generación bruta’,
www.sener.gob.mx, accessed 3 October 2007
7 CO2 Global Solution (2006) Eurus Project Design Document, UNFCCC, 10 July
8 Union Fenosa (2007) La Joya Hydro Project (Costa Rica) Project Design
Document, UNFCCC, 9 March
9 Secretaria de Energía de Mexico (1992) Ley del Servicio Público de Energía
Eléctrica, in Articulo 3º, 23 December
10 World Bank (2006) Project Information Document: Appraisal Stage for La Venta
III, 26 April
11 Comisión Regulatoria de Energía (2001) Resolución Num. RES/140/2001
12 Mexican Parliament (2006) Ley para el Aprovechamiento de las Fuentes
Renovables de Energía, February
14 Point Carbon (2008) ‘World Bank loan to support Mexico’s domestic climate
strategy’, Carbon Market News, 10 April
15 Galvadón, H. (2007) Interview with H. Galvadón, Supervisor de Construcción for
AgCert, 21 August, Veracruz, Mexico
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Construcción, Medio Ambiente, y Mantenimiento of Granjas Carroll Mexico, 24
August, Perote, Mexico
Caribbean’, report, 2 June, for Inter-American Development Bank, Washington, DC
18 Mekler, J. (2007) Interview with J. Mekler, Project Developer for
COMEXHIDRO, 15 August, Mexico City, Mexico
19 Estrada, M. (2008) Interview with M. Estrada, CDM Consultant, 24 April
21 SEMARNAT (n.d.) ‘Mecanismo para un Desarrollo Limpio’,
www.semarnat.gob.mx/queessemarnat/politica_ambiental/cambioclimatico/Pages/
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(CESPEDES) (2006) ‘Se crea el fondo Mexicano de carbono’, Boletin CESPEDES,
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Mexico’, Comisión Federal de Electricidad, 6 August, available at
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FEDERAL_ELECTRICITY_COMMISS.pdf
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December
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accessed 5 January 2008
23
Nicaragua
Vital statistics
Portfolio mix (by installed capacity): 64 per cent bunker oil; 14 per cent hydro;
12 per cent biomass from sugarcane; 9 per cent geothermal; 1 per cent diesel
[1]
Average price of electricity: residential 12.06¢/kWh; industrial 11.52¢/kWh [3]
Regulator: Instituto Nicaragüense de Energía (INE)
Policy maker: Ministerio de Energía y Minas (MEM)
Environmental permits: Ministerio del Ambiente y Recursos Naturales
(MARENA)
Rural electrification: MEM

The Nicaraguan Constitution establishes that the government must provide
basic resources such as water and electricity to the people. In 1957, the Electric
Industry Law established that the Instituto Nicaragüense de Energía (INE)
would handle all electrical supply and policy related to the sector. In 1994,
Executive Decree 46-94 separated INE’s generation from the country’s electri-
cal sector policy making. Empresa Nicaragüense de Electricidad (ENEL) was
created to handle generation. In 1998, Comisión Nacional de Energía (CNE)
was established by Law 272 and charged with the task of creating energy
policy while INE was transformed into the regulation body [4]. The state-
owned Empresa Nicaragüense de Electricidad (ENEL) was also vertically and
horizontally disintegrated by Law 272. In 2007, CNE’s responsibilities were
taken over by the Ministry of Energy and Mines (MEM) and a strategy to
reduce fraud and stolen electricity was developed [5].
Privatization was an attempt to decrease the outages that had become

frequent due to natural disaster and political instability in the 1980s and
1990s. ENEL’s contribution to supply dropped from 50 per cent in 2002 to 24
per cent in 2003. Law 272 is advantageous for generators in that it allows them
to sell their electricity to distributors or large consumers, or directly into the
national grid.
While privatization has begun and private investment is entering the
country, the restructuring of the sector and other difficulties have prevented the
sector from achieving substantial increases in efficiency. ENEL is overstaffed by
40 per cent, and 50 per cent of the country is still without electricity [4]. The
distribution losses were estimated in 2005 to be 28.8 per cent [3]. Outages
were commonplace in the country every afternoon during peak demand
because of capacity shortage, before 2006 when President Daniel Ortega took
office and began to reform the sector [6 and 7].

Presidential Accord 279 of 2002 provided the policy that first established clear
guidelines for run-of-river and wind projects and supported them with incen-
tives. Law 467 supported hydro resources with income, construction and
import tax exemptions for 15 years [5]. These laws helped build momentum
for a comprehensive law that promoted renewable energy [8].
In April 2005, Nicaragua passed Law 532 as a reform to the 1998 Law
272 (Ley de la Reforma de la Ley de Industria Eléctrica). This law provided
renewable generators with full exemption from income taxes for seven years.
There was also a partial exemption from taxes on equipment and other project
costs for seven years and exemption from import taxes for renewable genera-
tors. The tax exemptions will cut the first costs of renewable project
implementation by an estimated 15–20 per cent [9].
Also, Law 272 established a maximum of 5.5–6.5¢/kWh for electricity
from hydro installations and prevented Power Purchase Agreements (PPAs)
from being signed for projects [10]. The limit on how much money generators
can get for energy and their lack of ability to sign PPAs restrict opportunities
for investment.
In June 2008, Nicaragua passed a law that provides a stable 8.5¢/kWh
payment for geothermal energy. Geothermal developers with projects under
construction when this law was passed were pleased with the premium they
will receive over hydro generators [11].
CDM portfolio
Nicaragua hosts a few unusual projects that include one biomass project of
sugarcane bagasse mixed with eucalyptus to generate electricity all year. The
country hosts a geothermal project that includes the San Jacinto plant with
66MW. There is a beer maker that will generate electricity from the methane of
NICARAGUA 267
2
Number of projects
0
methane methane
capture capture
Figure 23.1 Projects registered or in validation in Nicaragua
its wastewater and feed it into the grid. The large liquor company, Caña de
Flor, is also looking to use CDM in a similar way.
Mesoamerica Energy has identified additional sites in Nicaragua that are
considered strong candidates for growing the park to over 60MW.
Mesoamerica Energy has begun securing the relevant land for the new sites and
has been measuring at the new site since mid-2006 [12]. There is also a planned
1MW wind application on an island called Ometepe in Lake Nicaragua that
would serve a hotel and facility for tourists [13].

DNA office
The country’s Designated National Authority (DNA) office is housed in the
Office of Climate Change and Clean Development (Oficina de Cambio
Climático y Desarrollo Limpio) within MARENA. It, like Honduras’ office,
has experienced turnover that has prevented it from being as efficient as possi-
ble [14].

Nicaragua has a few dispersed entities that could help promote CDM develop-
ment. The Netherlands helped create a baseline study that calculated an
average emission factor that small-scale project owners can use. An Accord of
Energy Cooperation between Venezuela and Nicaragua exists and occasionally
provides financial backing for energy projects. Also, the United Nations
Development Programme (UNDP) and the Global Environment Facility
completed a study to assess potential sources for carbon reductions and found
that the forestry sector has the most potential [9].
Carbon brokers
No one carbon broker stands out as a frequently used entity in Nicaragua, but
Ecosecurities was used as a carbon consultant for the San Jacinto geothermal
project and could gain traction in the country as more projects are contem-
plated.

There are 30MW of installed biomass, including one unique eucalyptus cogen-
eration facility. Seventy megawatts more of biomass potential remain. Only
104MW of hydro energy are installed, but there are 1760MW of developable
potential [15 and 16]. Approximately 18,000 solar home systems exist as a
result of a World Bank rural electrification programme called PERZA
(Programa de Electrificación Rural en Zonas Aisladas). The Inter-American
Development Bank also sponsored a $700,000 programme of a partial grant
and partial loan for solar homes in rural areas. Also, a few experimental hotel
and hospital solar rooftop systems are in place. There are 923MW of geother-
mal potential and 77MW of geothermal installed. The country has no wind
installations, but a few developers are interested in the Istmo de Rivas y Zona
de Hato Grande where there are approximately 200MW of potential [5].

Nicaragua hydro developers suffer from a price cap of 5.5–6.5¢/kWh for
hydro energy payments. Also, the Ley de Industria Eléctrica of 2005 estab-
lished that there can be no PPAs, which is a major barrier for renewable energy
projects since they rely on these contracts for securing loans to cover the large
initial project investment costs [17].
Another financial constraint in the country is the fact that it has reached its
limit for debt from development banks. This situation occurs when develop-
ment banks deem the country unfit to repay the loan in a reasonable amount of
time due to existing debt and political and economic conditions. The inability
of development banks to participate in loans then limits the type of financing
that state entities in the country can access. While these state-run generators
are usually not interested in CDM revenues, Nicaragua is a unique situation
that breaks the mould. Mario Torres of state-run ENEL would utilize these
funds from development banks if they were available. Even without this
financing, he is spearheading a directive to earn Certified Emission Reductions
(CERs) for four hydro projects. Torres is using his experience with CDM
within the MARENA to run this effort [17].
Within the private sector, there is less interest in CDM. Of about 100 large
companies in country, 20 per cent have the possibility of utilizing the CDM. Of
those 20 per cent, only 10 per cent are interested in the CDM and 5 per cent
are researching it. There has not been a critical mass of interested parties to
make the Mechanism well known [13]. Getting financing in Nicaragua for
feasibility studies is particularly difficult since the country has such a violent
and politically unstable history [17].
NICARAGUA 269
Nicaragua does not have the same social resistance to new hydro projects
as is found elsewhere in the region, such as in Guatemala and Costa Rica.
There have been no large dams that mar the industry’s reputation. This lack of
large dam development results because a 650MW project called Hydro
Copalar was considered but then dismissed when a study showed that it would
displace too many people [18]. New CDM hydro projects would probably face
more financial hurdles in securing a loan for the high capital costs of the
project than from social resistance.
Much of Nicaragua’s interest in CDM activities tends to be immature and
behind that of other countries. The National Engineering University contains
Grupo Fenix, which is dedicated to photovoltaics and solar cookers. However,
the group works mainly on rural applications and has little information about
the CDM. Without using the Programme of Activities methodology, the size of
the group’s projects is too small to consider CDM. The National Engineering
University also has a group (RUPAB) that is investigating biodiesel and
methane digesters and has test facilities, but no projects are close to the indus-
trial-scale size necessary for the CDM. The Union of Agricultural Producers of
Nicaragua (UPANIC) is interested in methane capture, but has little informa-
tion about it to provide to its members. The coffee giant Ramacafé is interested
in capturing methane through the industrial processes, but the Alianza Energía
y Ambiente and the Comisión Centroamericana de Ambiente y Desarrollo
created a feasibility study that showed that the technology was expensive and
not profitable [18].
Summary
The Nicaraguan CDM market is relatively immature and lacks the requisite
drivers such as strong legislation and a stable investment climate to make
renewable energy an important part of country’s future. The notable exception
to this situation is the well-developed and growing geothermal industry in the
country. With regard to this technology, the country could become a leader in
the region for others to follow. The country has tremendous wind potential
compared to its neighbours in the region, but has not benefited from any devel-
opment in this sector.
References
1 Dirección General de Electricidad (2005) ‘Generacion bruta por tipo de
combustible (GWh)’, www.ine.gob.ni/PagElctric.html, accessed 10 March 2008
2 Ecosecurities (2005) San Jacinto Tizate Geothermal Project Design Document,
UNFCCC, October
4 Millán, J. (1999) ‘The power sector in: Nicaragua’, in Profiles of Power Sector

Renewable Energy Forum in Bonn, Germany, 29–31May 2004, 19 May, available
6 Renewable Energy and Energy Efficiency Partnership (n.d.) ‘LAC policy
descriptions: Nicaragua’, Sustainable Energy Policy Initiative, available at
www.oas.org/dsd/reeep/formularios/nicaragua_pb_reeep.doc
Mexico
8 Comisión Nacional de Energía de Nicaragua (n.d.) ‘Energías renovables’,
http://ine.gob.ni/DGE/mercado/CNE%20energias%20renovables.pdf, accessed
21 February 2008
10 Asemblea Nacional de Nicaragua (2005) Ley Para la Promocion de Energía
Eléctrica de Fuentes Renovables, Normas Jurídicas de Nicaragua, April 14
11 Marketwire (2008) ‘Polaris Geothermal Inc.: Nicaraguan Congress Approves
Law’, newsbrief, 11 June
13 Barahona, C. (2007) Interview with C. Barahona, Representative of Centro de
Producción Más Limpia de Nicaragua, 17 September, Managua, Nicaragua
14 Madriz, M. (2007) Interview with M. Madriz, Designated National Authority
Assistant in MARENA 19 September, Managua, Nicaragua
en America Latina y el Caribe: Situacion y propuestas de politica’, report for
CEPAL and GTZ, 19 May, available at www.cepal.org/publicaciones/
xml/9/14839/Lcl2132e.pdf
16 Comision Nacional de Energia (2006) ‘Potencia de Energía Renovable en
Nicaragua’, 7 September
17 Torres, M. (2007) Interview with M. Torres, Project Planner for Empresa Nacional
de Electricidad of Nicaragua, 19 September, Managua, Nicaragua
18 Sthagtagen, M. (2007) Interview with M. Sthagtagen, Former DNA of Nicaragua,
September 19, Managua, Nicaragua
24
Panama
Vital statistics
Portfolio mix (by installed capacity): 50 per cent hydro; 49.5 per cent thermal;
0.4 per cent other renewables [1]
Average price of electricity: residential 14.95¢/kWh; industrial 10.15¢/kWh [3]
Market manager: Centro Nacional de Despacho (CND)
Regulator: Oficina de la Dirección de Electricidad de Autoridad Nacional de
los Servicios Públicos (ASEP)
Policy maker: Comisión de Política Energética (COPE) en Ministerio de
Economía y Finanzas
Environmental permits: Autoridad Nacional del Ambiente (ANAM)
Rural electrification: Oficina de Electrificación Rural (OER) de COPE

Panama had a vertically integrated governmental monopoly on electricity until
1997 when Law 6 (Marco Regulatorio e Institucional del Servicio Público de
Electricidad) privatized the sector. Prior to this law the Instituto de Recursos
Hidraulicos y Electrificacion (IRHE) monopolized both generation and
distribution. In 1998 IRHE sold over 50 per cent of its distribution and genera-
tion network to Spanish, US and Canadian investors such as Constellation,
AES, Enron, HydroQuebec and Union Fenosa. The Panamanian government
was then relieved of having to make expensive capacity additions [4]. Law 6
also established the COPE (Comisión de Política Enérgetica) to make laws
related to energy and analyse them [5].
The Panamanian Constitution establishes that public resources are the

property of public domain and should be used for the well-being of citizens. To
that end, the Autoridad Nacional del Ambiente (ANAM) sets tariffs for the use
of natural resources. Law 44 (Ley del Ambiente) sets the rules for the utiliza-
tion of hydro resources.
Privatization occurred in two stages as the government tried to ease the
country into this new regime. The first stage lasted from February 1997 to
February 2002 and consisted of a Single Power Purchaser model whereby
generators had to sell 100 per cent of their capacity to the Transmission
Enterprise, a state-owned division of IRHE. This transmission company then
resold the power to distribution companies without making a profit. A
minimum of 85 per cent of electricity transactions had to flow through this
process while the remaining 15 per cent consisted of large power purchases
from end-users and distribution companies. Then after February 2002, the
power sector began operating with a wholesale market. Now generators offer
prices that are based on the market price instead of based on their cost of
generation. In contracts between large consumers and generators, the Centro
Nacional de Despacho tallies the accounts and has participants, who require
more electricity than was provided by their Power Purchase Agreement (PPA),
buy the needed generation based on wholesale prices [6].
Privatization has been a success story in Panama with distribution losses
falling from close to 20 per cent during the state-run years to 10 per cent in
2005 [6 and 3]. However, foreign investment alone has not filled the gap of
required capacity additions, and the government had to form a new state-run
company called EGESA to provide some new generation. The lack of new
capacity additions led to Law 45 of 2004 that provided additional incentives
for small renewable energy projects. A study contracted by the World Bank and
Inter-American Development Bank showed that it is cheaper to provide incen-
tives for private sector involvement in new generation rather than to have the
government provide these new additions [7]. Thermal generation, rather than
renewable energy, has filled the bulk of new demand since the market was
privatized. This generation was chosen because it is easier to get the required
permits and stimulates less controversy over siting [8].
There is currently pressure to reduce tariffs, but subsidizing the industry
would again lead to more losses in efficiency. Despite complaints about the
high tariff prices at approximately 15¢/kWh, customers are sheltered from rate
fluctuations, which are common in other Latin American countries, because of
the country’s use of the US dollar.

Law 44 states that the government will prioritize clean electricity sources and
that COPE and ANAM will assess the environmental damage of conventional
sources. Also, Article 55 of Law 6 establishes that it is the obligation of the
state to promote sources of energy that cause the least pollution by offering 5
PANAMA 273
per cent more to renewable energy. This price preference can be established in
the national wholesale market that Law 6 mandates. Other renewable energy
incentives include the ability of renewable generators to create long-term PPAs
of up to ten years and the allowance of a four-year grace period in these
contracts [9].
A lack of sufficient renewable energy development under Law 6 led to Law
45 in 2004 which provided incentives that are specific to renewable energy
[10]:
1 For projects under 500kW that are not connected to grid, developers do
not have to pay import taxes on equipment.
2 For projects under 10MW, there are no transmission and distribution
charges for projects.
3 There is a 5 per cent reimbursement for projects that provide infrastructure
that develops the country and a 25 per cent reimbursement of project costs
based on the amount of CO2 emissions reduced because of the plant. This
reimbursement is applicable to 100 per cent of the generator’s taxes on the
project during the first ten years of operation. Renewable generators
cannot receive both the 25 per cent reimbursement and CDM revenues [8].
4 Renewable energy generators can contract with any distributor regardless
of where they are located, and sell to the spot market and the Central
American market.
5 For projects that are 10–20MW, the same benefits as above exist, except
the producer does have to pay transmission and distribution charges for
the MW above ten that they produce. The generator cannot directly
contract with a distributor. The 25 per cent reimbursement for CO2 reduc-
tions is applied to 50 per cent of their annual tax, not 100 per cent. (This
clause does not apply to wind development above 10MW, which gets
transmission and distribution exempted for all sizes because of its low
capacity factor.)
While Law 45 of 2005 has provided strong incentives for small renewable
energy applications, access to transmission in remote areas that support this
development can be problematic.
As of October 2007, companies cannot earn both the local carbon credit
and Clean Development Mechanism (CDM) revenues by law. Law 45 is in the
process of being revised to possibly include the following provisions:
1 Companies would be able to receive both local and international carbon

credit [8].
2 Renewable energy projects of all sizes would receive exemption from trans-
mission and distribution charges [11].
3 Twenty to thirty per cent of CERs from projects would have to go towards
sustainable development of the community [11 and 7].
CDM portfolio
8
6
Number of projects
0
methane methane
capture capture
Figure 24.1 Projects registered or in validation in Panama
Hydro projects have dominated the Panamanian portfolio as they have for
other Central American countries. Prospects for other development are
discussed in the ‘Unique experiences and situations’ section.

DNA office
The Designated National Authority (DNA) office is located within the Climate
Change Group of the Autoridad Nacional del Ambiente (ANAM). This group
is dedicated not only to CDM projects, but also to greenhouse gas inventory
and mitigation. The office grew from two people to five in 2005 when the
CDM became active. Its staff travel to international conferences and decide on
the national approval of projects collectively [8]. The office’s website has an
extensive list of interested project developers and map of project sites, but has
little information on navigating the CDM project cycle.
Other domestic institutional support or barriers

Other than the typical institutional support systems for Central America, the
author found no additional support programmes.
Carbon brokers
There is no one carbon broker that has dominated the country, and none has
offices there. Econergy International was involved in writing a Project Design
Document (PDD) for a hydro expansion project that was never registered. Most
projects are undertaken by the project developer, which is Union Fenosa with the
Spanish Climate Change Office for three of the five hydro projects in the country.
PANAMA 275

In Panama, there are an estimated 2341MW of developable hydro and
702MW installed. The country has 400MW of wind potential and has several
medium-sized sites of about 50MW in the process of being developed. There is
one cogeneration unit with 10MW. Geothermal potential totals only 40MW,
and none of it has been developed [9].

There is some warranted concern on the part of project owners that hydro
projects will no longer be able to prove their additionality. As of March 2008,
there were 91 interested hydro developers listed on the Panamanian DNA
webpage while wind attracted only 16, methane capture seven, energy
efficiency four, forestry six and transport one. Of the five projects already
registered, all are hydro-related. Panama’s grid, which is nearly 50 per cent
hydro, shows that this technology is neither novel nor new in the country.
However, hydro developers can prove additionality because there has been no
new development in this sector since 1984 [12].
Other concerns of additionality arise due to the new proposed legislation
supporting renewable energy. The current proposed changes to Law 45, which
would allow carbon-free generation to qualify for both local and international
carbon credits, may allow for such strong financial incentives that projects can
no longer prove financial additionality. If changes to Law 45 are passed,
questions of financial and regulatory additionality may be raised in earning
double carbon credit for technologies.
Panama has a variety of interesting proposals that would have little
problem proving additionality due to a barriers analysis because of the novelty
of the ideas. The Avian Producers Association is interested in using chicken
excrement for electrical generation [8]. Within the movement to create energy
or harvest methane from landfills, the most advanced proposal is by a
company called Sicmar International, which hopes to use Startek Technologies
plasma trash converter to create energy and obsidian that would be sold. This
application would be the first commercial plant in the world. They have 20-
year contracts with three municipalities to receive their trash, have all of the
requisite permits and the environmental impact statement completed, and hope
to have three to four sites running in two years [13]. There is interest in creat-
ing biodiesel and bioethanol and harvesting methane from bananas. There is
also a proposal to treat wastewater from boats that pass through the Panama
Canal [14].
Other than hydro development and these unusual project proposals, there
is movement in the wind sector. However, most of the best sites for develop-
ment are on the tops of mountains that are isolated from transmission grids
and on land owned by indigenous groups. Spanish Union Fenosa has a well-
developed 40MW site called Hornitos, and locally owned Santa Fe Energy has
a permit to develop an 81MW farm with another 81MW expansion [11]. To
avoid any potential difficulty integrating this large wind project in with the
surrounding community, Santa Fe plans on giving 30 per cent of CERs from

this project to the community.
Social resistance to hydro project development stems from the implementa-
tion of Rio Bayano, a 150MW project that was commissioned in 1976 and
developed with the help of the World Bank. This project did not give much
thought or extensive studies to how to relocate the people living in the flooded
area and provide them with fair payment for land. This application and the
other large dams in Central America that were developed in the 1970s and
1980s not only angered local communities, but also drew the attention of
environmental groups around the world. It is because of these problems that a
20–30 per cent CER contribution to community development is being
proposed [15]. Despite the initial problems with this project, a 50MW firm
capacity addition to the project is being proposed by AES and carbon credits
are being sought by Econergy International Corporation [12].
A limit on PPAs was set in 1997 at four years to provide a fluid market-
place that would provide the best possible price of electricity for the customer.
Now the limit is set at ten years, which provides more certainty for developers
but is still not ideal since it is shorter than the typical 20-year PPAs that are
structured for many renewable energy projects in order for the project owner
to get a loan [15].
Other barriers for developers arise from the governmental organization of
the energy sector. Energy responsibilities are split between the environmental
authority where the DNA is housed, ASEP, which stands alone and serves as
the regulator and dispenses permits, COPE, which makes energy-related laws,
and is in the Finance and Economy Ministry, and a Dirección Nacional de
Hidrocarburos y Energía Alternativa that is located in a separate ministry
(Ministerio de Comercio e Industria). During January 2006, these disparate
groups began fighting over jurisdiction and responsibilities and the government
created a Secretary of Energy to help coordinate interests. However, this secre-
tarial position has less power than a ministerial position, and some involved
parties are advocating the creation of a Ministry of Energy that would house
related groups. Logistically, a separation of energy responsibilities leads to
slow permit and decisions as many parties are involved, occasionally duplicat-
ing efforts [7].
Summary
Panama’s need for capacity additions, strong renewable energy legislation and
incentives, open marketplace, and relatively stable economy, because of use of
the US dollar and revenues from Canal passages, make it an ideal place for
CDM investment. However, the government’s dispersed energy-related sectors
create complications for prospective investors. Social resistance to and diffi-
culty proving additionality on hydro projects could limit the number of these
projects that are successfully registered. Unique project types and a few wind
applications are being pursued as alternatives to hydro.
PANAMA 277
References
2 Ecosecurities (2006) Paso Ancho Hydroelectric Project Design Document,
UNFCCC, 9 December
4 Kelly, M. B. (n.d.) Panama: The Electric Power Sector: Opportunities and
Challenges, Business Panama, the American Chamber of Commerce and Deal Inc,
available at www.fenixpanama.com/panama-electric-power-sector.html
5 Ley No 6, in 23,220, La Gaceta Oficial, Editor, 3 February, 1997, pp1–70
6 Millán, J. (1999) ‘The power sector in: Panama’, in Profiles of Power Sector
7 Dias, F. (2007) Interview with F. Dias, Comision de Politica Energetica, Ministerio
de Economia y Finanzas, 5 October, Panama City, Panama
8 Cartin, Z. (2007) Interview with Z. Cartin, Member of the Designated National
Authority team of Panama in Oficina del Cambio Climático de ANAM, 3 October,
Panama City, Panama
en America Latina y el Caribe: Situacion y propuestas de politica’, report for
CEPAL and GTZ, 19 May, available at www.cepal.org/publicaciones/xml/9/
14839/Lcl2132e.pdf
10 Ministerio de Economia y Financas de Comision de Politica Energetica de Panama
(2004) Legislative Assembly Law 45, 4 August
11 Moreno, R. (2007) Interview with R. Moreno, President of Santa Fe Energy, 4
October, Panama City, Panama
12 Econergy International Corporation (2004) Bayano Hydroelectric Expansion and
Upgrade Project in Panama Project Design Document, UNFCCC, 20 January
13 Shaw, D. (2007) Interview with D. Shaw, Vice President of Sicmar International
Panama, 4 October, Panama City, Panama
14 Reyes, E. (2005) ‘Panama: Ready for CDM /carbon market investments’, presenta-
tion at ETSAP Annex IX Technical Conference, 4–7 April, Taipei, Taiwan
15 de Gracia, R. (2007) Interview with R. de Gracia, Asociacion de Servicios
Publicos, 5 October, Panama City, Panama
25
Peru
Vital statistics
Portfolio mix: 27 per cent thermal; 71 per cent hydro [1]
Average price of electricity: 4.34¢/kWh residential; industrial N/A [3]
Capacity payment: yes, but exact amount not available [4]
Market manager: Comité de Operación Económica del Sistema Interconectado
Nacional (COES)
Regulator: Organismo Supervisor de la Inversión de Energía (OSINERG)
Policy maker: Ministerio de Energía y Minas (MEM)
Environmental permits: Ministerio del Medio Ambiente
Rural electrification: Dirección General de Electrificación Rural (DGER) in
Minsterio de Energía y Minas

Peru has special challenges for renewable energy development because of
simultaneous events that promoted natural gas development and hindered
hydro development in the late 1990s. A huge drought during the 1998 El Niño
caused massive disruptions in the electrical sector as the 19 per cent hydro-
based system could not support the demand at the time [5]. This crisis
happened on the heels of Shell’s discovering over 16 trillion cubic feet of
natural gas in the Camisea region of Peru in the 1980s [6]. In order to promote
more thermal generation to provide a backbone for the system to prevent Peru
from being susceptible to droughts and promote more natural gas extraction,
President Alberto Fujimori took radical steps to support the natural gas indus-
try and discourage hydro development. In late 1998 and 1999, Peru passed
two laws that modified various articles and definitions of the Law of Electric
Concessions (26980 and 27239), which prevented new hydro development [7

and 8]. Fujimori then passed the Law of Promotion of Development of the
Natural Gas Industry (27133), which promoted natural gas extraction in the
Camisea gas fields by providing land concessions and fixed natural gas trans-
port costs to ensure a 12 per cent annual profit for transmitters [9]. In 2000,
the Peruvian government instated a contract that ensured that all gas from the
Camisea fields would be paid for regardless of whether it is extracted under a
‘take-or-pay’ rule, and which included loan guarantees [2]. In 2001, another
law allowed for exemption from the 18 per cent value-added tax for natural
gas developers [6].
The anti-hydro laws remained in place until 2001 when the Law for the
Promotion of Hydro Concessions (27435) was passed. Although hydro devel-
opment was permitted after that date, investors were not eager to enter the
market because the domestic natural gas was so cheap that hydro, with high
initial capital costs, could not compete for generation. However, with on-site
gas contracts set at a maximum $1/MMBTU (1 million British Thermal Units)
for electrical use and state-controlled contracts for natural gas generation
locked at $23.9/MWh for seven years in 2003 [2], it is still very difficult for
hydro to compete as their costs average $1300/kW installed [10].
There is hope for renewables in Peru, though. The current president, Alan
Garcia, is interested in promoting renewable energy again because the main gas
pipeline from the Camisea fields is susceptible to guerilla attacks and other
disruptions like earthquakes. Diversifying Peru’s energy resources also means
that Peru could potentially sell the increasingly valuable natural gas to its
neighbour, Chile, whose gas pipeline from Argentina was recently cut off after
the Argentinean peso was devalued in 2002 [10].
The Peruvian electrical sector privatization occurred in 1992 and quickly
led to lower marginal costs and electricity prices, improved reliability and
service, and fewer black losses from stolen electricity [6]. After privatization,
governmental intervention was still required to ensure that a certain amount of
new development occurs by setting policies to promote sufficient generation.
The large generation companies that were previously state-run were unbundled
and made private. Edegel, Lima’s public utility, and Electroperu are the two
largest examples of these previously state-run utilities [11]. By 2000, private
companies handled 65 per cent of generation and 80 per cent of distribution,
but much of this generation came from the large, previously governmentally
owned companies.
The privatization of the market, however, did not produce a flawless
system. The restructuring was based on the Chilean model and set node prices
that dictate the amount that generators earn when selling to distributors. These
node prices are based on the average cost of generation and set for different
points along the grid. During a drought in 2004, the spot market price rose
from $20/MWh to $100/MWh. Generators were earning an average national
node price of $25/MWh. They stopped selling to the distribution companies
because they realized that there was more money to be made in the spot
PERU 281
market. Therefore the state-run utility, Electroperú, had to supply these distrib-
ution companies during the shortage [12].
The pro-natural gas laws have prevented the free market from operating as
intended and reduced the attractiveness of the market for private investment.
As a result, the government or previously governmentally owned companies
still own 44 per cent of the electrical generation [6 and 12].

In 2006, the Law for Assuring the Development of Efficient Electrical
Generation (28832) called for an evaluation of the potential of hydro and
other renewable resources [13].1 In March 2007, the Peruvian government
encouraged developers to capture the estimated 57,000MW of untapped hydro
energy by exempting this and other forms of renewable energy development
from the 19 per cent value-added tax [14].
Within the existing Peruvian energy generation, combined heat and power
plants currently receive priority dispatch on the system. This dispatch order
favours sugarcane plants that burn the bagasse or unusable residue of the
sugarcane husk for electrical power and heat to process the sugar [15].
Regulations governing the promotion of geothermal resources now exist
and may help promote the approximately 300MW of geothermal potential
that are suitable for development. These regulations stem from Law 26848 of
1977. This law finally passed in 1997, but regulations for its implementation
were not put into place until July 2006 because of the country’s focus on hydro
development in the 1990s and the exploitation of the Camisea natural gas
fields in the early 2000s [16].
In May 2008, Peru passed a decree (1002) promoting renewable energy
legislation that consists of wind, solar, tidal, geothermal, biomass and hydro
under 20MW. The main provisions of this decree include the following:
1 The Ministry of Energy and Mines should set a goal for renewable energy
penetration every five years with a minimum set at at least 5 per cent for
the first five years.
2 Renewable energy gets priority dispatch.
3 The difference between renewable generation and competitive energy
generation will be covered by a higher tariff price that will be set by
OSINERG to compensate for the higher cost of renewable generation.
4 Renewable energy will receive priority for connection in areas where trans-
mission lines are heavily loaded.
5 Funds will be dedicated to research and development of renewable energy.
[17]
This new renewable energy law of May 2008 was accompanied by the creation
of a Ministry of Environment, elevating environmental protection and manage-
ment from its previous post in the Ministry of Environment, Housing and
Territorial Development [18].
CDM portfolio
16
14
12
Number of projects
10
0
methane methane
capture capture
Figure 25.1 Projects registered or in validation in Peru
Peru had two registered and validated projects in January 2008; by April 2008,
its portfolio of projects in the process of validation had grown to 18 projects.
Peru has followed the trend of the region in its development of hydro projects.
There is interest, however, in future wind projects. There are four fledgling
wind companies that are in the initial stages of acquiring land concessions for
development. Five wind study concessions for projects of 80–300MW have
been granted. Norwind, Eólica del Peru, Soleil SAC and Petromont are the
main companies making moves to develop these wind resources, which are
concentrated on the coast [19].

DNA office
The Peruvian Designated National Authority (DNA) office is sited and studied
by other countries as a model for development. It was divided into a promotion
and regulatory arm, Fondo Nacional del Ambiente (FONAM) and Consejo
Nacional del Ambiente (CONAM). FONAM has its roots in the government as
its predecessor was created by Law 26793 in 1997 and is intended to increase
public and private investment in sustainable industries. It morphed to support
Clean Development Mechanism (CDM) projects in 2001 when a National
Strategy Study between the World Bank and the Peruvian government recom-
mended a promotion office for CDM projects. The FONAM office now helps
projects through the complex CDM project cycle by offering free advice in the
initial stages of the process such as the creation of a Project Idea Note (PIN).
The office has other functions such as working as an intermediary between
hydro and mining companies and the community where these projects are
PERU 283
located. Representatives from the organization also work with local banks to
explain Certified Emission Reductions (CERs) and their role in project finance.
Virtually all CDM projects in the country have used FONAM’s services at
some stage in project development. FONAM hopes to eventually develop
Project Design Documents (PDDs) and earn a portion of projects’ CERs as
payment for services. FONAM also authored a paper addressing renewable
energy barriers and how to overcome them in Peru [20]. Currently the office’s
operating budget is paid for by grants from organizations like the Risø
National Laboratory of the Technical University of Denmark, but there were
only enough funds during the autumn of 2007 to sustain the office’s operations
for another six months [21].
FONAM’s director of the board also heads up the regulatory CDM office,
CONAM. It also maintains private sector status by having its operating budget
satisfied by grants, and operates efficiently, like a private company. Therefore,
FONAM attracts project developers as it spans both worlds, providing regula-
tory guidance in a timely fashion consistent with the private sector [21]. While
operating in both of these worlds is attractive to project developers, it creates a
conflict of interest since the head of the board of both CONAM and FONAM
is the same person. Since CONAM has the regulatory duty of approving
projects by asserting that they achieve sustainable development or not, it is
controversial that the head of its board would also be involved in an organiza-
tion that promotes individual projects [21].
While FONAM has been able to achieve moderate success and provide a
model for other Latin American countries, CONAM has experienced more
problems. The people who work there change with each new administration.
The lack of continuity in the office means that each person’s knowledge of
projects and their history is weak. Also, Peru is unable to contribute effectively
in international climate change conferences since each time there is a confer-
ence, a different person with little experience is sent. These individuals then
have little negotiating power since they are new to the meeting. This revolving
door of personnel is a reflection of the way people in Peru do not consider
positions in government as a career, but instead as a short stint away from the
private sector. There has also been a lack of employees within CONAM to
carefully assess each project that applies and to keep up with the ever-changing
CDM rules, in addition to the ongoing greenhouse gas inventories and adapta-
tion to climate change projects [22 and 23].

Beyond CONAM and FONAM, the Ministry of Energy and Mines has
contracted studies to better understand how renewables can play a part in
Peru’s future. The first of these studies was completed by a local NGO called
the Centre for Conservation of Energy and the Environment (CENERGIA),
who created a detailed diagnostic of the country’s current solar and wind devel-
opment and made predictions for the future of these markets [24]. The second
assessment, authored by Green Energy, considered the potential for all renew-
ables in the country given the resources available [25]. UNEP and Risø created
a report entitled ‘Institutional Strategy to Promote the Clean Development
Mechanism in Peru’ through its Capacity Development for CDM [26]. Peru
also supports renewable energy through a project hosted by the National
Service for Industrial Work (SENATI) to improve local technicians’ ability to
service renewable energy equipment. The Intermediate Technology
Development Group (formerly Practical Action) is an international charity that
has a long history of promoting renewable energy, especially micro hydro, in
remote areas of Peru [27].
Carbon brokers
Ahlcarbono has had the most success, with a total of 29 registered or valida-
tion-stage projects, 17 of which are in Peru. The founders had experience in the
World Bank during the early stages of the CDM, and one of them, named
Lazro Eguren, also worked in FONAM promoting projects for the country.
This experience allowed Mr Eguren to get to know local project developers in
the country. Ahlcarbono handles all types of projects and will tailor their work
to meet the needs of the client [28]. Ecosecurities also has an office in Lima.

Peru has not been studied extensively for its solar potential, but some areas in
the Andes average 6kWh/m2 per day. The National Meteorological and
Hydrological Service (SENAMHI) estimates that 19GWh/year of wind energy
are possible for Peru [29]. There are an estimated 1000MW of small hydro
potential that have not yet been captured. More studies are needed to know the
exact geothermal potential. Biomass residue has huge potential to satisfy the
country’s needs as 21 per cent of the nation’s thermal and 81 per cent of its
hydro generation could be replaced by using biomass residue [20].
Because of the lack of interest in renewables during the late 1990s under
the Fujimori regime, Peru has no wind map of the country. The Ministry of
Energy and Mines began negotiations with the National Renewable Energy
Laboratory (NREL) of the US to create a wind map, but the standards for the
project in terms of resolution and budget were set so low that NREL refused to
do the project. Likewise, there are no geothermal projects in the country, and
other than recent interest from Japanese banks to look at two sites on the
border with Chile, there has been no exploratory testing for the feasibility of
sites [19].

Peru is well positioned to host new renewable generation projects because its
economy has experienced a domestically unprecedented growth of about 6 per
cent annually for the last seven consecutive years [30]. This economic growth
translates into 5–6 per cent electrical growth annually, necessitating approxi-
mately 200MW of new firm capacity each year [10]. Also, ironically, the
Fujimori laws of 1998 and 1999 that barred new hydro development did have
PERU 285
the positive consequence of now creating an additionality argument for current

hydro development that is seeking CDM revenues.
Despite this recent economic upswing and argument for additionality, Peru
is a risky marketplace for investment. Between 1985 and 1990, the currency
was devalued by 40 per cent [31]. Then the economy recovered between 1990
and 1998 with 7 per cent growth each year, but the trend stopped in 1998
when there was an economic crisis because of financial upset in places such as
Asia, Russia and Brazil, costly repercussions of that year’s El Niño, and the
beginning of President Fujimori’s scandal charges [32].
Beyond these general investment risks, Peru’s history of wavering political
support for renewables may make investors nervous that by the time they are
ready to build a new project, there will no longer be the political will to under-
take it. The Office of Energy Policy within the Ministry of Energy and Mines
creates a long-term plan for the future each year. But, these plans are not
binding and last only ten years, a time span that may be too short for investors
who want secure energy prices for the life of the plant. Therefore, investors are
concerned that the political will to support renewables may be fleeting and
energy policy may reverse itself once again [20].
With regard to the social and environmental concerns about project devel-
opment in Peru, there has been some local and governmental resistance for a
variety of reasons, but the organized NGOs are too busy fighting the mining
industries to also fight renewable energy development. Resistance at the state
and local level has been focused on hydro projects. In Cañon Pato, Duke
Energy’s 250MW hydro plant was installed before an Environmental Impact
Statement (EIS) was required. The Ministry of Energy wants to use the reser-
voir as a tourist site and use an average of 2.6m3/s instead of 5.6m3/s. In order
to have this request heeded, the Ministry of Energy is asking Duke to retroac-
tively complete an EIS [10]. Locals at the small reservoir of Lago Cuné want to
be able to graze cattle on lands above the reservoir and depend on a certain
water level for their animals to use. It is essential that the community be in
support of the project since, in Peru, 80 per cent of the community must be in
agreement with the project in order for the developer to get the land permit
[33].
Summary
Peru is not in a situation of capacity shortage like some of its neighbours, but
its strong economic growth for the past seven years hints that soon large
additions will be needed. The renewable energy law of 2006 that exempts
developers from the value-added tax may promote some interest in the renew-
ables sector. If the proposed renewable energy law is passed, then significant
interest in development may occur. However, the recent laws during the
Fujimori regime that barred hydro development and supported natural gas
extraction may make investors wary of this marketplace since there is the
possibility that political whims could quickly change again.
Note
1 Usually, Peruvian law refers to hydro resources in the title and later includes other
renewables in the text. It is clear that hydro is the most common and widely
accepted renewable technology in the country.
References
1 Ministerio de Energía y Minas de Peru (2006) ‘Produccion: Estadistica electrica
2005–2006, generacion y transmision’, www.minem.gob.pe/electricidad/
estad_inicio.asp, accessed 20 March 2008
2 Netherlands CDM Facility (2005) Netherlands CDM Facility, Poechos I Project
Design Document, UNFCCC
Latin America and the Caribbean 1995–2005’, World Bank, Washington, DC
5 Joval, J. R. (n.d.) The Impact of the 1997–1998 El Niño on the Andean
Community of Nations, United Nations International Strategy for Disaster
Reduction, available at www.eird.org/eng/revista/No1_2001/pagina22.htm
6 Center for Energy Economics (2006) ‘Gas and power in Peru’, case study, Bureau
of Economic Geology, University of Texas at Austin, 27 March
7 Ministerio de Energía y Minas (Direccion de Electricidad) (1999) Ley que
Modifica Diversos Artículos de la Ley de Concesiones Eléctricas, 14 December
8 Ministerio de Energía y Minas (Direccion de Electricidad) (1998), Ley que
Modifica Diversos Artículos y Definición Anexa de la Ley de Concesiones
Eléctricas, 24 September
9 Ministerio de Energía y Minas (Direccion de Electricidad) (1999), Ley de
Promoción del Desarrollo de la Industria del Gas Natural, 3 June
10 Melindo, M., Armas, H. and Reyes, J. O. (2007) Interviews with M. Melindo, H.
Armas and J. O. Reyes, Ministerio de Energía y Minas, Unidad de Electrificación,
11 Center for Energy Economics (2006) ‘Results of electricity sector restructuring in
Peru’, Bureau of Economic Geology, Jackson School of Geosciences, University of
Texas at Austin, 27 March
13 Ministerio de Energía y Minas (Direccion de Electricidad) (2007) Ley para
Asegurer el Desarrollo Eficiente de La Generación Eléctrica, November
14 Ministerio de Energía y Minas (Direccion de Electricidad) (2007) Decreto
Supremo: Aprueban Reglamento de la Ley que amplía los alcances del Régimen de
Recuperación Anticipada del Impuesto General a las Ventas a las Empresas de
Generación Hidroeléctrica, 29 March
15 Ayon, H. (2007) Interview with H. Ayon, Gerente de Finanzas de Paramonga, 7
PERU 287
17 El Peruano (2008) Normas Legales: Decreto Legislativo (1002) de Promocion de

la Inversion para la Generacion de Electricidad con el Uso de Energías
Renovables, in 10219, 2 March
18 Congreso de la Republica (2008) Decreto Legislativo de Creacion de
Organizacion y Funciones del Ministerio del Ambiente, Decreto Legislativo de Ley
29157, 13 May
20 Fondo Nacional del Ambiente (2006) ‘Promoción de la participación pública y
privada en proyectos de Energía Renovable y Fortalecimiento de la capacidad de
FONAM’, report, 10 May
21 Garcia, D. (2007) Interview with D. Garcia, Fondo Nacional del Ambiente Energy
and CDM Specialist, 5 November, Lima, Peru
22 Iturregui, P. (2007) Interview with P. Iturregui, Former CONAM Designated
National Authority, 10 November, Lima, Peru
23 Gieseke, R. (2007) Interview with R. Gieseke, CONAM Designated National
Authority Office, 6 November, Lima, Peru
24 Centro para Conservacion de Energía y Ambiente (2004) ‘Diagnostico de la
situación actual del uso energía solar y eolica en Peru’, report for Ministerio de
Energía y Minas
25 Reto, C. (2005) ‘Estudio para la promocion de la generacion electrica con fuentes
de energia renovable’, report, Green Energy Consultoria y Servicios SRL
26 Cigaran, M. P. and Iturregui, P. (2004) ‘Institutional strategy to promote the Clean
Development Mechanism in Peru’, report, UNEP/Risø Capacity Development for
CDM, June
27 Coello, J. (2007) Interview with J. Coello, Intermediate Technology Development
Group, 7 November, Lima, Peru
28 Eguren, L. (2008) Interview with L. Eguren, CDM Specialist for Ahlcarbono, 9
February,
29 Navarro, E. M. (2007) ‘Conferencia Introductoria: Potencial del viento y la
aerogeneración en el Perú’, presentation at Congreso Sobre Biocombustibles
Energias Renovables, 17 May, Lima, Peru
30 Kozak, R. (2007) ‘Peru works to emulate Chile with strong growth, less poverty’,
Comtex News Network, 21 June
31 Rohter, L. (1987) ‘The slide steepens; Peru and Mexico try devaluation’, The New
York Times, 20 December
32 Public Broadcasting Systems, ‘Peru: Commanding heights’,
www.pbs.org/wgbh/commandingheights/lo/countries/pe/pe_economic.html,
accessed 20 February 2008
33 Harmon, G. C. (2007) Interview with G. C. Harmon, Santa Rosa Project
Developer, 7 November, Lima, Peru
26
Uruguay
Vital statistics
Portfolio mix: 42 per cent hydro; 35 per cent imported; 14 per cent fuel oil;
8 per cent gas oil [1]
Emission factor: predicted 0.2 tonnes of CO2/MWh [2]
Privatized electricity market: yes, but with almost no success
Existence of spot market: yes, although currently dominated by UTE
Capacity payment: yes, based on theoretical margin of reserve. While this
payment exists legally, it is not currently being employed [4 and 5]
Market manager: Administración del Mercado Eléctrico (ADME)
Dispatch: Despacho Nacional de Cargas (DNCU)
Policy maker: Dirección Nacional de Energía y Tecnología Nuclear
Regulator: Unidad Reguladora del Servicio de Energía Eléctrica (UREE) and
Unidad Reguladora de Servicios de Energía y Agua (URSEA)
Environmental permits: Dirección Nacional de Medio Ambiente
(DINAMA) of Ministerio de Vivienda, Ordenamiento Territorial, y Medio
Ambiente

Uruguay has primarily been served by hydro electricity from large dams like
Salto Grande, which is on the border of Argentina and Uruguay. Other than
these hydro resources, it has few fossil fuel reserves, receives a large portion of its
electricity from its neighbours, and has a history of negotiating power deals
across borders. Power managers have found that Brazil and Uruguay have some
complementary dry and wet seasons that allow power from an area with a dam
that is receiving more rainfall to redirect that power to the area without water
[2].
It is this close cooperation between nations that prompted Uruguay to

privatize the generation and distribution portions of its electrical sector with
Decree 16,832 in 1997. The goal was to try to have a similar electrical structure
to Argentina since the two countries were sharing the Salto Grande hydroelec-
tric facility [6]. At the time of this decree, natural gas was cheap and importing
generation was more economical than investing in new capacity. The privatiza-
tion of the industry has not led to any new generation (except for a 1MW
installation that runs on landfill gas). The reason for this failed attempt at priva-
tization is partly due to the competition new generators face on the spot market.
New generators would have to compete with existing state-run hydro plants,
the capital costs of which are already paid off, and submit cost bids based on
their marginal cost of generation, which is almost nothing. Also, generators may
not have entered the market because, according to the country’s Designated
National Authority (DNA), the rules for market entry were unclear [7].

UTE (Administración Nacional de Usinas y Transmisiones Eléctricas), the state
generator, provides nearly all of the country’s generation but is now in a situa-
tion of a lack of generation capacity because of the natural gas supply shortage
in Argentina.1 Because of this shortage and the current Minister of Energy’s
interest in renewable energy, there was recently a request for 60MW of genera-
tion which must consist of 20MW of microhydro, 20MW of wind and 20MW
of biomass in Decree 77 of 13 March 2006 [7]. UTE did not receive any
microhydro bids, but filled the other two categories. There is speculation that
no microhydro bids were offered because six months was not long enough for
prospectors to get bids organized in this sector. Also, the country is very flat
and has few hydro possibilities [6].
Bids in this elicitation were accepted on a least-cost generation basis, but
renewable energy generators only had to compete among themselves, provid-
ing a more level playing field. The average amount that will be paid by UTE for
energy as a result of this private bidding process is $80–90/MWh [6]. The
contract term for the energy purchase is 20 years [8]. Under Article 3 of Decree
77, the price difference that UTE faces for this new, renewable generation will
be covered by increased tariffs throughout the country for consumers. These
renewable generators also receive the benefit that they are exempt from trans-
mission tariffs. Locally produced technologies are favoured with a 10 per cent
improved chance of winning the bid process [2].
In March 2008, another elicitation for biomass, small hydro and wind was
sought by UTE for an additional 26.2MW of renewable energy. The elicitation
provides preference for bids of up to 14MW of wind energy and 12.2MW of
small hydro [9]. By 22 July 2008, UTE received responses from 15 companies
for 150MW of generation from 6 biomass and 16 wind projects to fill this
mandate [2]. The immediate future renewable energy legislation will most
likely involve more elicitations for renewable energy capacity targets, while
URUGUAY 291
longer-term renewable energy goals will be a part of a more comprehensive

plan for expansion [6]. UTE is considering confronting the capacity shortage
by supporting more interconnection with Brazil in order to use complementary
dry and wet seasons in the existing hydroelectric facilities [2].
CDM portfolio
2.5
2.0
Number of projects
1.5
1.0
0.5
0
methane methane
capture capture
Figure 26.1 Projects registered or in validation in Uruguay
Uruguay’s sugarmill owners have become interested in using the bagasse they
burn more efficiently since the price of electricity has increased in recent years
as Argentina’s natural gas supply has become scarce.
Although there is no movement in the wind sector yet, Gamesa of Spain is
interested in developing a 10MW wind farm called Sierra de Caracoles. Spain
is cancelling a portion of Uruguay’s debt in exchange for the first option to buy
the Certified Emission Reductions (CERs) from this project.
The country also hosts a landfill gas capture and electrical production
(1MW) project that was funded by a Global Environmental Fund grant and is
not eligible for Clean Development Mechanism (CDM) revenues.
Although only three projects had been registered by January 2008, the
DNA office counted three landfill gas, one biogas from wastewater, five bio-
energy, five energy efficiency and two wind projects in its portfolio of
developing projects [10].

DNA office
Uruguay has good capacity building for CDM within its DNA office located in
the Ministry of Housing, Territorial Regulation and Environment. This office
partnered with the Swiss Federal Institute of Technology to create a tool to
assess the sustainability of local CDM projects [11] and has provided materials
such as videos, pamphlets and seminars for interested parties and investors.
The DNA office also helped complete a comprehensive study of potential areas
of CDM growth in Uruguay with projected baselines for each sector [12].

A lack of initiative to support wind mapping has further prevented investors
from entering this market. Currently the Global Environmental Fund and the
National Energy Division are working on a wind mapping project, but it is not
completed [6]. There is no other capacity development for renewables.
Carbon brokers
MGM International and Ecoinvest both have large offices in Buenos Aires,
Argentina, just two hours from Uruguay’s capital of Montevideo by boat.
However, these carbon brokers have not broken into this market because of
what they see as the major hurdle, UTE’s dominance in the electrical market
[13].

Uruguay has few opportunities for renewable energy based on its resources. As
previously mentioned, the country is flat with two sets of rolling mountain
ranges of about 200 metres just inland of the coast. This flat topography means
that a large area of land would have to be flooded to provide a significant
amount of hydroelectricity. Daniel Tasende of UTE thinks that the next area of
hydro development will be to convert irrigation dams for electrical production,
as COMEXHIDRO of Mexico has begun to do [2].
There have been no publically available wind or solar studies. The country
is not sited in an area of geothermal activity. Currently, biomass from wood,
cane and rice provide the most robust renewable opportunities and constitute
most of the development.
The biggest potential area of growth is the sugarcane industry, which
covers 3400 hectares and has an estimated harvest of 19,600 tonnes per year
[14]. Producers are currently using the residue from this crop in inefficient
boilers. As carbon prices increase and CDM revenues become better known in
the country, these growers have begun to install more efficient equipment and
sell excess energy to the grid as other countries in the region have done [7].

UTE’s monopoly of the electrical sector is not a legal monopoly, but instead is a
monopoly that can be interrupted by other generators. UTE managers contend
that this monopoly is necessary for such a small country. Excess revenues go
back to the state and help reduce taxes. And UTE’s control is limited by
regulating organizations. This monopoly control can be seen as a detriment to
CDM development since state-run generators are generally not interested in
pursuing CDM revenues. However, UTE is moving away from state control,
URUGUAY 293
with five contracts with private generators signed in 2007, which may open up
doors for new CDM development [2].
Despite the country’s relatively poor wind potential, there are some initia-
tives in wind development, but they have all run into difficulties. One of its
small mountain ranges on the coast does provide a good wind resource that
Gamesa of Spain began to take advantage of by planning a 50MW farm.
Gamesa sold the wind data gathered at this site to a Brazilian company that
is now developing the site for a 10MW farm and was hoping to produce
electricity in 2008. Perhaps the site has experienced difficulties because its
economic viability is questionable as it is 30km from the closest interconnec-
tion point with the electrical grid [15]. Typically, one kilometre of transmission
per MW installed is the maximum distance a farm can be sited from a connec-
tion point [16].
Another wind developer, called Agroland, began producing electricity from
its 0.45MW site in early 2007, but the quality of this energy was not good
enough and contained harmonics, which are deviations from the ideal
sinusoidal wave of the grid voltage, caused by fluctuations in the power supply
due to the variable wind available [17]. These harmonics prevented this small
site from being connected to the grid and selling to UTE until the third quarter
of 2008 [2].
Infrastructure in Uruguay for wind development can also be a challenge
and limitation. Nuevo Manantial, a 4MW wind project that in September
2008 was being expanded to 13MW, had to lease crane equipment from
abroad for a month to assemble the farm since there were no domestically
available cranes suitable for mounting the turbines on this mountain range.
Both Nuevo Manatial and Agroland are in the process of seeking carbon
credits through the CDM [2].
Other German wind prospectors have found a good site on the Uruguayan
coast near the border with Brazil, but this site was near a low-voltage connec-
tion area and not suitable for transmitting energy efficiently. After the
prospecting team ran into difficulty, UTE published all of the low and high
voltage transmission lines on the Internet to avoid having this problem
repeated [2].
UTE is also in the process of constructing a 10MW wind farm. For other,
large-scale projects, UTE sees the Approved Consolidated Methodology
(ACM) 0002 that is for large-scale grid-connected renewable energy as a major
barrier to development of CDM projects. The default baseline calculation in
this methodology counts the emission factor of the last 10 per cent of genera-
tion dispatched on the system for CER calculation. Since Uruguay, like Chile,
values the water it holds in dams and only releases it to provide load-following
during peak demand, UTE representatives of Uruguay argue that this method-
ology is not appropriate. The amount of water released will be the same with
or without a CDM project, they argue. What will decrease as a result of the
CDM project is the fossil fuel generation used as the baseload. Therefore, UTE
wants to have the CER calculation based only on this displaced generation
instead of the last 10 per cent dispatched, which is mostly hydro with no
emission factor in Uruguay [2].
The second largest barrier for Uruguay to earn reductions is that imported
energy is counted as zero with regard to its emission factor. Since 35 per cent of
Uruguay’s energy is imported from Brazil and Argentina and 42 per cent of the
remainder is hydro generation [1], UTE is predicting a national emission factor
of just 0.2 tonnes of CO2/MWh for the country and not incorporating revenue
from CERs into their economic analysis for future capacity additions [2].
Despite these many challenges to developing projects in Uruguay, there
may be an opportunity for private developers since the price of electricity has
risen in recent years as the Argentine natural gas supply has been cut. The
average marginal cost in 2004 was 5.35¢/kWh and has surged to 20.9¢/kWh in
2006 [18].
Uruguay is experiencing social problems related to its Garabi hydroelectric
dam on the Uruguay River. The power for this dam would be shared between
Argentina, Uruguay and Brazil, but mainly utilized by Uruguay’s neighbours.
Uruguayans are against the development because they have seen the poor
performance of the enormous Salto Grande dam that is operating at less than a
quarter of its rated capacity because of a drought. The detrimental effects these
huge dams have on downstream flow concern Uruguayans [19].
Summary
Uruguay has several major barriers to renewable energy CDM project develop-
ment. The inability of the country to privatize its electrical sector because of
the low generation prices competitors would have to face has prevented devel-
opment. Also, the low capacity factor of the country is due to the large hydro
portion of its electricity portfolio and limitations of ACM 0002. However, a
recent supply shortage of natural gas from Argentina has prompted the govern-
ment to make solicitations for 60MW and later 26.2MW of renewable energy
that would compete only among renewable generators on the cost of genera-
tion. This movement has spurred some interest in the sector, but in order for
this trend to continue, more permanent, long-term policies that promote
renewables will need to be supported.
Note
1 The only energy applications that UTE does not own are Salto Grande hydro facil-
ity, which is operated by the Ministry of Foreign Affairs, and a 0.9MW landfill gas
project that is owned by the Municipality of Maldonado [2].
References
1 Administracion Nacional de Usinas y Trasmisones Electricas (UTE) (2006) Cifras,
Organizacion y Estudios Empresarioales Relaciones Publicas
2 Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE,
27 November, Montevideo, Uruguay
URUGUAY 295

4 Ariztía, R. and Watts, D. (2002) ‘The electricity crises of California, Brazil and
Chile: Lessons to the Chilean market’, in Power Engineering (LESCOPE), pp7–12
5 Brandino, A. (2008) Interview with A. Brandino, Gerente de Despacho for
Administración del Mercado Eléctrico, 11 February
6 Larissa, D. (2007) Interview with D. Larissa, Dirección Nacional de Energía,
27 November, Montevideo, Uruguay
7 Kasprzyk, M. (2007) Interview with M. Kasprzyk, Designated National Authority
in the Ministerio de Vivienda, Ordenamiento, Territorial, y Medio Ambiente,
Division de Cambio Climático, 27 November, Montevideo, Uruguay
9 Administración Nacional de Usinas y Trasmisiones Eléctricas (2008) Parte Uno:
Pliego de Condiciones Particulares para Pliego de Condiciones y Especificaciones
para la realización de CONTRATOS DE COMPRAVENTA DE ENERGIA
ELÉCTRICA por parte de UTE a proveedores instalados en el territorio nacional
que produzcan dicha energía utilizando como fuente primaria energía eólica, de
biomasa, o de pequeñas centrales hidráulicas, in P37637, 6 March
10 Ministerio de Vivienda Ordenamiento Territorial y Medio Ambiente (2007)
Portafolio de Proyectos de MDL 2007, CD Rom from DNA office
11 Heuberger, R., Sutter, C. and Santos, L. (2003) Host Country Approval for CDM
Projects in Uruguay: Application of a Sustainability Assessment Tool, Swiss
Federal Institute of Technology ETH, Institute of Environmental Physics, Energy
& Climate, and Ministry of Housing, Territorial Regulation and Environment of
Uruguay
12 Unidad de Cambio Climático (2002) ‘Estudio de apoyo a la aplicación del
Mecanismo para el Desarrollo Limpio del Protocolo de Kioto en Uruguay’, report
for Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente, May
13 Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant,
14 Amy, L. (2007) Market Opportunities for Renewable Energy Equipment, US
Commercial Service
15 Gamesa (2007) Project Idea Note 10MW Wind Farm in Uruguay, accessed
through Ministerio de Vivienda, Ordenamiento Territorial, y Medio Ambiente de
Uruguay
16 Garcia, A. (2007) Interview with A. Garcia, Project Developer for ABO Wind,
17 Integral Energy (2000) ‘Harmonic distortions in the electric supply system’, Power
Quality Centre: Technical Note #3, March
18 Administracion del Mercado Electrico (2004, 2006) Costo Marginal Horario
Promedio Mensual - Año 2004 y 2006, available from www.adme.com.uy/
mmee/precios/2006/spotprom.htm
19 Tierramerica (2008) ‘Uruguay: Hydro-electric dam criticized’, Daily Estimate,
25 March
27
Other Latin American Countries
There are a few Latin American countries that do not merit an entire country-
specific chapter. These countries have little to no Clean Development
Mechanism (CDM) activity and/or renewable energy legislation. Therefore,
they will be covered only briefly in this chapter. However, it is important for
investors to know which countries fall into this category and be aware of major
issues in the country that could be hindering CDM and renewable energy
development.
Venezuela
Venezuela signed the UNFCCC accord on 27 December 1994 [1] and ratified
the Kyoto Protocol in 2004 [2], but has not yet set up a Designated National
Authority (DNA) office because its president, Hugo Chavez, does not believe in
the market-based Kyoto Protocol [3]. It has been proposed that the DNA be
housed in the Ministry of Natural Resources and Environment [1]. Without the
formation of this office, Venezuela cannot undertake any Clean Development
Mechanism (CDM) projects since national approval cannot be given.
However, Venezuela has taken steps to address global warming as its first
greenhouse gas inventory was completed between 1994 and 1997. The results
from this study showed that 77 per cent of the country’s emissions came from the
electrical sector. These results are somewhat surprising since hydro electricity
covers 70 per cent of the country’s electrical energy needs and point to the
country’s overall low emissions [1]. This generation mix for electricity is even
more surprising given the country’s wealth of natural gas and petroleum reserves.
In 1999, the sector was privatized, but remained vertically integrated,
meaning the same company owned generation, distribution and transmission
[4]. In May 2008, the state still owned 89 per cent of generating facilities. The
main private sector participant is the Electricidad de Caracas, which is major-
ity-owned by American AES and owns most of the thermal generation. This
largely state-owned system will be challenging for independent power produc-
ers (IPPs) to penetrate [5]. This could be a significant barrier for future CDM
development.
Three new thermal power plants are under construction in order to reduce
the country’s dependence on hydro power [6]. Power prices remain reasonable
with residential rates averaging 5.5¢/kWh in 2005, and the country is experi-
encing a modest electrical demand growth rate of 3.2 per cent per year [4].
Paraguay
Paraguay has no registered CDM projects. However, it signed the UNFCCC
accord in 1993 and ratified the Kyoto Protocol in 1999. It has signed
memorandums of understanding with Austria, Japan and Spain for CDM
activities and has completed greenhouse gas inventories in both 1990 and 1994
[1].
Paraguay is limited in its ability to participate in renewable energy CDM
projects because it sources 99.9 per cent of its electrical generation from hydro
plants [7]. Therefore, new renewable energy projects would yield very few
Certified Emission Reductions (CERs) since there would be no emissions
displaced. This large hydro portion provides relatively cheap electricity with a
residential average of 5.7¢/kWh [8].
Another huge barrier for renewable energy CDM projects in Paraguay is
the fact that is has a complete lack of private sector participation in generation
[5]. State-run utilities in general are reluctant to become involved in CDM
projects because of their institutional rigidities and the complications presented
by regulatory and financial additionality requirements.
Therefore, the only movement for CDM activities, in the form of Project
Idea Notes (PINs), comes from a landfill gas capture project in Asunción and
carbon sequestration in pastureland [1].
Caribbean countries
Many of the countries in this chapter are countries that border the Caribbean
Sea and merit their own introduction. They suffer from having electricity prices
that are three to four times as expensive as US electricity rates because of the
small sizes of the generation units, which cannot achieve economies of scale,
and the lack of regional transmission, which means that high levels of backup
spinning reserves which are usually sourced from expensive sources are
required. Most utilities in the region permit non-utility generation, require
utilities to purchase from IPPs, and mandate grid interconnection (with the
exception of Granada for all of these categories). Some incorporate renewable
energy into integrated resource planning. However, few of these islands have a
high degree of private participation because the sizes of the systems are too
small to support a competitive marketplace [5]. The Bahamas, Guyana and
Suriname have grants for off-grid renewable energy projects. Of the countries
discussed below, only Guyana supports carbon trading fiscally [9].
There are a few regional capacity building institutions that lend help to
renewable energy developers. The task force on regional energy policy within
OTHER LATIN AMERICAN COUNTRIES 299
the Caribbean Community Secretariat, which is comprised of Barbados,

Trinidad and Tobago, Granada, Guyana, Jamaica, Suriname and Bahamas, is
working on a collective purchase agreement of crude oil from Venezuela for
these countries. It is also trying to build a pipeline that would allow natural gas
from Trinidad and Tobago to be utilized throughout the region [9].
There is also a Geocaribe group that promotes the exploitation of geother-
mal resources in the area and a Caribbean Renewable Energy Development
Programme (CREDP), which has set a goal of sourcing 5 per cent of electrical
generation from renewable energy by the year 2015 [9].
Cuba
There is one validated and registered CDM project in Cuba that involves a
switch from an open cycle to a combined-cycle gas facility. There are also three
landfill gas capture projects undergoing validation in the country. There is an
opportunity for renewable energy CDM projects in the country since the
country routinely experiences capacity shortages and suffers from blackouts.
The government has attempted to remedy this problem by installing better
transmission and distribution lines and synchronizing generating plants [10].
As tourism grows, the electrical demand should continue to provide opportuni-
ties for new market entrants.
With regard to capacity development, a Cuban Society for the promotion
of renewable energy sources (CUBASOLAR) exists, but the country’s 283
billion barrels of proven oil reserves may be a competitor to renewable energy
[11].
Jamaica
Jamaica has one wind farm CDM project, called Wington, which was devel-
oped by the Petroleum Corporation of Jamaica. This 20.7MW farm is an
anomaly in a country that relies mainly on diesel and heavy fuel oil generation
mixes. This wind farm received a subsidy from the Dutch Development and
Environment Related Export Transactions Programme, which paid for 20 per
cent of the total initial investment. The Dutch were involved in this transaction
because the turbines were sourced from The Netherlands, and this subsidy was
applied to this equipment [12].
Jamaica received funding from the Japanese government through the
UNDP to set up its DNA office, which is now located in the Ministry of Lands
and the Environment. The Ministry of Meteorological Services and the
Scientific Research Council also have experience with the CDM through
baseline studies and representing Jamaica at international conferences [13].
The electrical sector was restructured in 2000, and 80 per cent of the
Jamaican Public Service Company, which previously had a monopoly, was
purchased by Mirant. IPPs that enter the Jamaican grid would still compete in
a semi-monopolistic market.
Guyana
In Guyana, there is one CDM project requesting registration, called the
Skeldon Bagasse Cogeneration Plant. This project involves the burning of
sugarcane residue to displace light fuel oil. The Community Development
Carbon Fund and International Emissions Trading Association helped support
this project by purchasing its CERs and negotiating the CDM project cycle
[14]. The DNA office is located in the Hydrometeorological Service.
French Guiana, Barbados, Granada, Bahamas, St. Lucia,

Trinidad and Tobago and Suriname
The remaining countries in the Caribbean region have little to no CDM
capacity development. There is a wind farm project that is being proposed by
the state utility LUCELEC on St Lucia, and a Canadian firm conducted a feasi-
bility study for a farm on the island [15].
In Trinidad and Tobago, the government owns transmission and distribu-
tion, but generation is privately owned. The DNA is located in the Ministry of
Public Utilities and the Environment’s Environmental Management Authority.
Within this sector, there is a CDM standing committee. This committee has
only had to approve one methanol project. This project has not yet achieved
UNFCCC registration [13].
Suriname has had UNEP/Risø support for technical assistance, but has no
CDM activity and no DNA office listed on the UNFCCC website. French
Guiana also is absent from this list of DNA offices. The Bahamas has a DNA
office within the Ministry of Energy and Environment’s Environment, Science
and Technology Commission, but thus far has no CDM activity [16].
References
2 Venpres (2004) ‘Venezuelan government will ratify the Kyoto Protocol’, newsbrief,
8 November, available at Venezuelanalysis.com
3 Rangel, F. (2007) Misión de la República Bolivariana de Venezuela. Intervención
del Delegado de la República Bolivariana de Venezuela ante la Segunda Comisión,
Sr. Franklin Rangel, tema: ‘Desarrollo Sostenible’ en el marco del 62º período de
sesiones de la Asamblea General, letter to Venezuelan government, 30 October,
available from www.venezuelaonu.gob.ve/detalle_publicacion.php?id=513.
4 Perez, M. A. A. and Sanchez, J. J. R. (2004) ‘The electric business in Venezuela:
Restructuring and investment opportunities’, presentation at World Energy
Congress, 5–9 September, Sydney, Australia
6 International Energy Regulation Network (2006) ‘Country Fact Sheets: South
America: Venezuela’, www.iern.net/country_factsheets/market-venezuela.htm,
accessed 20 March 2008
OTHER LATIN AMERICAN COUNTRIES 301
7 International Atomic Energy Agency: Data Centre Statistics (2005) ‘Energy and
Environment Data Reference Bank (EEDRB): Republic of Paraguay’,
www.iaea.org/inisnkm/nkm/aws/eedrb/data/PY.html, accessed 26 March 2008
9 Clarke, R. (2006) ‘Alternative sources of energy and effective implementation
policy’, presentation at Caribbean Connect: A High Level Symposium on the
CARICOM Single Market and Economy, 28–30 June, Barbados
10 Granma International (2007) ‘Electricity production in Cuba exceeds maximum
demand’, newsbrief, 4 October, Havana, Cuba
11 Jaffe, A. M. and Soligo, R. (2001) ‘The potential for the U.S. energy sector in
Cuba’, report for Cuba Policy Foundation, December
12 Ecosecurities (2006) Wington Wind Farm Project Design Document, UNFCCC, 6
January
Caribbean’, report, 2 June, for Inter-American Development Bank, Washington,
DC
14 UNFCCC (2007) International Bank for Reconstruction and Development,
Guyana Skeldon Bagasse Cogeneration Project Design Document, 7 November
15 Chaderton, T. (2003) ‘LUCELEC explains its renewable energy efforts’, press
release, 27 February, Caribbean Electric Utility Service Corporation, available at
www.lucelec.com/news/news_february24_2003.htm
16 UNFCCC (2008) ‘Designated National Authorities (DNA)’,
http://cdm.unfccc.int/DNA/index.html, accessed 30 March 2008
28
Regional Trends
Each brief country description was meant to give the reader an indication of
the specific challenges and opportunities available for renewable energy Clean
Development Mechanism (CDM) development in each country. Many of the
challenges that countries face are isolated circumstances, but some can be
generalized to the region. Latin American regional trends in privatization and
renewable energy policy can help illuminate the larger picture of the history
and prospects for renewable energy CDM development.
Regional trends
The phenomenon of privatization has impacted all Latin American countries to
varying degrees. In general, this trend has brought about more efficient electri-
cal sectors that can provide their customers with lower prices, fewer outages
and fewer losses due to stolen energy and inefficient transmission and distribu-
tion. Chile cut its distribution losses in half as a result of privatization.
Electrical coverage has also grown during this period to serve more of each
country’s population. However, privatization has not led to improvements
everywhere [1 and 2]. See Table 28.1 for the distribution losses before and after
privatization for select countries.
Just because a country privatized its market aggressively does not mean
that privatization took hold. Ecuador adopted a wholesale market, but because
of an economic crisis and distribution losses and subsidized tariffs that prevent
distribution companies from paying independent power producers (IPPs) in a
Table 28.1 Non-technical electrical losses before and after privatization
Year privatized Pre-privatization Post-privatization

El Salvador 1998 11.3% 9.3%
Guatemala 1998 13.5% 15.5%
Nicaragua 2000 30.1% 28.78%
Panama 1998 17.88% 10.42%
Source: World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the
Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/
timely fashion, it has not led to a competitive sector [3]. But, in general, most
countries that opened the market have experienced the entry of new partici-
pants [4]. Also, companies such as AES Gener and Enersis that once operated
only domestically have begun to expand their markets abroad and partner with
foreign companies [1].
Restructuring the market has complicated the electrical sector of each
country in various ways. Several new entities that regulate, oversee, set policies,
address rural electrification and plan for the future had to be formed in each
country. Also, each emerging new electrical market had to organize itself based
on a pre-existing model or a hybrid of existing models. These markets range
from least-cost bid to price cap and energy payment markets. Countries under-
going restructuring also had to decide how to manage existing state-run
companies. Costa Rica, Mexico, Honduras and Uruguay allowed these compa-
nies to continue operating and are allowing new entrants to fulfil a portion of
the country’s new capacity needs. Other countries, such as Chile, Ecuador,
Argentina and Peru, required state-run entities to separate into smaller,
privately owned and run companies. In general, those countries that have more
open markets with less state-run generation have the potential for more CDM
projects. See Table 28.2 for the diversity of privatization schemes in select Latin
American countries.
Table 28.2 Privatization schemes in select countries
Country Privatization scheme

Argentina Price-based energy auctiona
Brazil Distributors’ aggregate generation neededb
Chile Cost-based energy auctionc
Costa Rica 30% IPP penetrationd; IPPs must be renewable generators with
35% Costa Rican ownershipe
Honduras Limited PPAs with large consumers; ENEE offers fixed price unless
generation solicitedf
Mexico IPPs enter market under self-supply scheme or get paid 85% of
CFE’s avoided costsg
Panama Two-phased energy transition with single purchaser model before wholesale marketh
Sources:
a Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in
South America’, Utilities Policy, vol 14, no 3, September, pp196–207
b Organisation for Economic Co-operation and Development (2005) ‘Regulation of the Electricity Sector’, OECD
Economic Survey of Brazil 2005, OECD, Paris
c Millán, J. (1999) ‘The electrical sector in: Chile’, in Profiles of Power Sector Reform in Selected Latin American
and Caribbean Countries, Inter-American Development Bank, Washington, DC
d Villa, G. (2007) Interview with G. Villa, Director of Energy within Ministerio de Ambiente y Energía, Costa
Rica, 27 September, San Jose, Costa Rica
e Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September,
San José, Costa Rica
f Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of
Honduras, 11 September, Tegucigalpa, Honduras
g Secretaria de Energía de Mexico (1992) Ley del Servicio Público de Energía Eléctrica, in Articulo 3º, 23
December
h Millán, J. (1999) ‘The power sector in: Panama’, in Profiles of Power Sector Reform in Selected Latin American
REGIONAL TRENDS 305
Table 28.3 Summary of renewable energy legislation
Country Legislation
Argentina Production tax credit of 1.5 peso ¢/kWh for wind, hydro under 30MW, biomass
and geothermal, and 0.9 peso ¢/kWh for solar; 15-year exemption from income
taxesa
Belize None
Bolivia Standards for PV installationsb; several rural energy programmesc,d
Brazil Phase I: 1422MW wind, 1191MW small hydro and 685MW biomass from bagasse
(sugarcane residue) by 2008 with a 60% local component requirement
Phase II: 10% of overall generation by 2022; 90% local component requirement
suggestede
Chile Short Law I: Guaranteed grid access and reduced transmission rates for projects
under 20%f; Short Law II: 5% of country’s generation for residential customers by
2010g; Short Law III: 10% of residential, industrial and commercial customers’
energy sourced from renewable sources by 2024h
Colombia No income or value-added tax on importations for the first ten years of operation;
other taxes on salaries, research equipment and machinery exempted for ‘first-of-
a-kind’ projectsi,j; 35% income tax waiver for projects that give 50% of CERs to
community developmentk
Costa Rica Former feed-in tariff for small renewable energyc; ICE will only buy renewable
generation from IPPs; IPPs must have a 35% Costa Rican ownership structure; IPPs
can make up only 30% of market; IPPs must sign contract with ICE for generation
price, and relinquish plant operations to ICE after 18 years of operation in a Build,
Operate and Transfer agreementl,m,n
Dominican Renewable energy fund from 5% of hydrocarbon saleso; subsidized financing
Republic during ten years for a part of the capital required for installations not exceeding
50MW; 100% exemption from import tariffs on the equipment and tools needed
for renewable energy generation; ten-year exemption from income tax on
revenues obtained in generation of renewable energy; tax incentive for self-
productionp; dispatch priorityq
Ecuador Feed-in tariff for hydro under 10MW and wind, solar, geothermal and biomass
under 15MW; applies until 2% penetration of renewables in gridr; renewables get
guaranteed dispatch and exoneration from import and income taxess
El Salvador No taxes on renewable energy projects below 10MW for ten years; projects of
10–20MW are exempt from taxes for five years; projects do not have to pay taxes
on CER revenues from projectst; projects under 5MW have streamlined permitsu;
fund for renewable energy and soft loans being consideredv
Guatemala No import tax for equipment, no income tax for first ten years; retailers are oblig-
ated to buy electricity from private generatorsm; distributors have to buy
generation for projects under 5MWw
Honduras For applications below 50MW, no import tax for equipment and no income tax for
first ten years; state distribution company (ENEE) has to buy electricity from gener-
ators; ENEE pays its short-term marginal avoided cost + 10% for generation;
transmission tariff set at $0.01/kWh; systems under 3MW do not need a genera-
tion licence; generators can sell directly into the Central American grid or to large
consumers; permits may take a maximum of two months to processx
Mexico Renewable energy can be ‘banked’ and counted towards fulfilling the goal of
satisfying customer’s demand for the monthy; accelerated depreciation for renew-
able investorsz; lower transmission tariffs for renewables based on capacity
factoraa; new proposed LAFRE law would allow first dispatch and a green fund to
support renewables, accelerated depreciation on profits, and lower transmission
capacity charges based on the average capacity of the renewable sourcebb
Nicaragua No import tax for equipment, no income tax for first seven yearscc; a maximum of
5.5–6.5¢/kWh paid for hydro generationdd
Table 28.3 continued
Country Legislation
Panama Projects under 500kW do not pay equipment taxes; projects under 10MW do not
pay transmission and distribution charges; up to 5% of project costs can be
reimbursed if the project contributes to national infrastructure development and
up to 25% can be reimbursed based on the carbon reductions the project
represents; projects greater than 10MW can only obtain half of the carbon reduc-
tion potential; currently projects cannot receive both CERs and reimbursement for
project costs based on carbon reductionee
Peru Renewable energy exempt from value-added taxff; combined heat and power
systems get priority dispatchgg; geothermal resources promotedgg; recent Decree
1002 of May 2008 provides 5% renewable mandate, priority dispatch and trans-
mission for renewables, funding for renewables research and special tariff-setting
to reflect the higher cost of renewableshh.
Uruguay Elicitation for 20MW of wind, 20MW of small hydro and 20MW of biomass, and
2008 bid for 26.2MW; least-cost bid process only among renewable generatorsii,jj
Note: Abbreviations: CER (Certified Emission Reduction), ENEE (Empresa Nacional de Energía Electrica), ICE
(Instituto Costarricense de Electricidad), IPP (independent power producer), LAFRE (Ley para el Aprovechamiento
de Fuentes Renovables de Energía)
Sources:
a El Senado y Cámara de Diputados de la Nación Argentina (1998) Régimen Nacional de Energía Eólica y Solar:
Ley 25,019, 7 December, Boletín Oficial
b Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008) ‘Normativa’, April,
www.hidrocarburos.gov.bo/07_NORMATIVA/normativa.php, accessed 10 March 2008
c ESMAP (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and
challenges’, 15 June, Energy Sector Management Assistance Programme, World Bank, Washington, DC
d Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008) ‘Electricidad para vivir con dignidad’,
April, www.hidrocarburos.gov.bo/07_PLAN/plan.php, accessed 10 March 2008
e do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, presentation at Centro Clima: Centre for Integrated
Studies on Climate Change and the Environment, available through Renewable Energy Policy Network for the
21st Century at www.ren21.net/pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy%
20Policy%5B1%5D.ppt
f Ministerio de Economía Fomento y Reconstrucción (2004) Ley Corto I: Regla Sistemas de Transporte de
Energía Eléctrica, Establece un Nuevo Regimen de Tarifas para Sistemas Eléctricos Medianos, y Introduce
Adecuaciones que Indica a la Ley General de Servicios Eléctricos, 13 March, Diario Oficial de la Republica de
Chile
g Ministerio de Economía Fomento y Reconstrucción (2005) Ley Corto II: Modifica el Marco Regulatorio del
Sector Eléctrico, 19 May
h Ministerio de Economía Fomento y Reconstrucción de Chile (2008) Ley Nº 20.257, Comisión Nacional de
Energía de Chile, 1 April, Diario Oficial de la Republica de Chile
i Unidad de Planeación Minerio Energética (2003) Decreto No 3683, 19 December
j Cardonas, A. (2007) Interview with A. Cardonas, Administrator Ministerio de Energía y Minas, 10 October,
Bogota, Colombia
k Ministerio del Interior y Justicia (2003) Decreto 2755, 30 September, Diario Oficial 45,326
l Millán, J. (1999) ‘The power sector in: Costa Rica’, Profiles of Power Sector Reform in Selected Latin American
m CEPAL and GTZ (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas
de politica’, 19 May
n Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September,
San José, Costa Rica
o Congreso Nacional de La República Dominicana (2000) Ley de Hidrocarburos 112-00
p Congreso Nacional de La República Dominicana (2007) Ley No 5707 sobre Incentivo al Desarrollo de Fuentes
Renovables de Energía y de sus Regímenes Especiales, May
q Congreso Nacional de La República Dominicana (2001) Ley General de Electricidad Ley No 125-01
r Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de Desarrollo Limpio en Ecuador: Un
diagnostico rapido de los retos y oportunidades en el Mercado de Carbono’, report for Banco Interamericano
de Desarrollo and Ministerio del Ambiente and Corporación Interamericana de Inversiones
REGIONAL TRENDS 307
s Registro Oficial Ecuador (2005) Ley de Beneficios Tributarios para Nuevas Inversiones Productivas, Generacion
de Empleo, y Prestacion de Servicios, 18 November
t Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el
Caribe: Situacion y propuestas de politica’, commissioned by CEPAL and GTZ and prepared for the delegates
of the Second World Renewable Energy Forum in Bonn, Germany, 29–31 May, 19 May, available at
http://www.funtener.org/pdfs/Lcl2132e.pdf
u Sanchez, I. A. (2006) ‘Estudio sobre la aplicación del mecanismo para un desarrollo limpio en El Salvador’,
report for Ministerio de Medio Ambiente y Recursos Naturales, La Cooperación Internacional de Japón and
Universidad Centroamericana, June
v Red de Oficinas Económicas y Comerciales de España en el Exterior (2007) ‘El Salvador aprueba una Ley con
incentivos para inversiones en Energía Renovable’, notice in La Prensa Gráfica, 10 November, available at
www.oficinascomerciales.es/icex/cda/controller/pageOfecomes/0,5310,5280449_5282927_5284940_403018
4_SV,00.html
w Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and Promotion of Renewable
Energy, Ministerio de Energía y Minas, 7 September, Guatemala City, Guatemala
x Comision Nacional de Energía (2007) Decreto 70-2007, in La Gaceta: Diario Oficial de La Republica de
Honduras, 2 October, Tegucigalpa, Honduras
y Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of Comision Regulatoria de
Energía, 30 August
z World Bank (2006) Project Information Document: Appraisal Stage for La Venta III, 26 April
aa Comisión Regulatoria de Energía (2001) Resolución Num. RES/140/2001
bb Mexican Parliament (2006) Ley para el Aprovechamiento de las Fuentes Renovables de Energía, February
cc Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles
de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at
dd Asemblea Nacional de Nicaragua (2005) Ley Para la Promocion de Energía Eléctrica de Fuentes Renovables,
Normas Jurídicas de Nicaragua, 14 April
ee Ministerio de Economia y Financas de Comision de Politica Energetica de Panama (2004) Legislative Assembly
Law 45, 4 August
ff Ministerio de Energía y Minas (Direccion de Electricidad) (2007) Decreto Supremo: Aprueban Reglamento de
la Ley que amplía los alcances del Régimen de Recuperación Anticipada del Impuesto General a las Ventas a
las Empresas de Generación Hidroeléctrica, 29 March
gg Ayon, H. (2007) Interview with H. Ayon, Gerente de Finanzas de Paramonga, 7 November, Lima, Peru
hh El Peruano (2008) Normas Legales: Decreto Legislativo (1002) de Promocion de la Inversion para la
Generacion de Electricidad con el Uso de Energías Renovables, in 10219, 2 March
ii Kasprzyk, M. (2007) Interview with M. Kasprzyk, Designated National Authority in the Ministerio de Vivienda,
Ordenamiento, Territorial, y Medio Ambiente, Division de Cambio Climático, 27 November, Montevideo,
Uruguay
jj Administración Nacional de Usinas y Trasmisiones Eléctricas (2008) Parte Uno: Pliego de Condiciones
Particulares para Pliego de Condiciones y Especificaciones para la realización de CONTRATOS DE
COMPRAVENTA DE ENERGIA ELÉCTRICA por parte de UTE a proveedores instalados en el territorio nacional
que produzcan dicha energía utilizando como fuente primaria energía eólica, de biomasa, o de pequeñas
centrales hidráulicas, in P37637, 6 March
These changes in the electrical sectors of each country have succeeded in

creating an environment that allows for more efficiency and better service, but
have left many countries with a shortage in capacity. The organization of the
market and laws that provide incentives for new capacity additions through
production tax credits, feed-in tariffs, tax exemptions and renewable energy
mandates are all meant to stimulate the market without causing too drastic a
rate impact. However, the setting of these policies and incentives is not an exact
science and involves a bit of trial and error. Also, external events like the
collapse of both Ecuador’s and Argentina’s economies in 1998 and 2002 can
lead to a lack of capacity additions even if the policies and incentives are
appropriately set. Often these newly privatized countries are not able to attract
investment because the current price of electricity, which is usually based on
hydro resources that operate very cheaply, is low. New generators must
compete against these low-cost resources with their new generation. Other
countries, like Nicaragua, have had fewer new market entrants than the system
needs because of the country’s political and economic risks [5].
This situation has left most countries in Central America, as well as
Ecuador, Uruguay, Chile and Argentina, facing an energy crisis and importing
energy and fossil fuels to satisfy the current demand. The capital costs for
building new hydro applications are too high for private investors to take on as
state-run companies did prior to restructuring. This predicament has led to a
lack of capacity additions, blackouts and power shortages throughout the
region that are reminiscent of the 1990s when the state-run utility could not
provide adequate supply [1]. In order to reduce these supply shortages, the
government has begun contracting emergency generation from fossil fuel-
burning sources. This trend is especially pronounced in Central America where
many sites of ‘rented’ generation are springing up. These sites typically burn
bunker fuel oil #6, which is highly polluting and expensive. The government is
entering into Power Purchase Agreements (PPAs) with these entities for high
rates of 23–30¢/kWh. The government contracts these generators because they
can provide generation that is quickly installed, and they do not have to enter
into long-term agreements with the generators since the facility components
like the gas or diesel turbine can be easily moved to another location [6].
Hydro and other types of renewable generators do not receive this type of
preferential treatment. They are discouraged by these PPAs as they are still
forced to compete with the existing low-cost hydro generation on the grid in
energy auctions. In most cases, non-hydro or biomass renewable energy like
wind must compete against fossil fuel generation that earns capacity as well as
generation payments [7].
Private generators have also been discouraged from building new hydro
facilities in some countries because of droughts that have plagued areas of
South America. Colombia, Peru and Chile have experienced severe El Niño and
La Niña-related droughts since the late 1990s that caused outages [8, 9 and
10]. El Niño and La Niña Southern Oscillation impacts the surface tempera-
tures of the Pacific Ocean and brings either dry or wet condition and has had
dramatic impacts on the hydroelectric industries of Colombia, Ecuador and
Chile. Since hydro resources make up 50 per cent or more of each of these
country’s electrical grids, precipitation changes can cause energy shortages
[11]. Some countries like Peru even implemented legislation to discourage
hydro development in order to diversify the country’s generation sources,
reduce these outages and support the natural gas industry. From 1998 to 2000,
President Fujimori of Peru banned all new hydro development and put in place
strong incentives for natural gas plants [12, 13, 14, 15 and 16].
Recent high fossil fuel prices at $119 per barrel of crude oil (as of 30 April
2008), however, have made this type of new fossil fuel-based generation
undesirable in most countries [17]. Chile, which is currently facing a natural gas
supply shortage from Argentina, has had electricity prices jump from $40/MWh
REGIONAL TRENDS 309
in April 2004 to $250/MWh in April 2008 as the country has had to convert
most of its natural gas facilities to accept petroleum-based products [18].
As climate change has the potential to cause more unpredictable weather
patterns, worse drought conditions and higher rates of evaporation from reser-
voirs, and fossil fuel prices continue to rise, countries will most likely look to
increase interconnectivity in order to take advantage of the complementary
nature of hydro resources located in different regions in order to prevent
capacity shortages [1]. Already, Central America is boosting its existing line
connection by double its current capacity, and there are plans to connect this
grid with Mexico and Colombia [19]. Ecuador is increasing its interconnection
capacity with Colombia [20], and Uruguay is doing the same with Brazil [21].
These countries have also begun to consider renewable energy policies to
promote generation with more stable fuel costs.
Renewable energy legislation

In response to these high fossil fuel prices, most Latin American countries have
begun to promote renewable energy with incentives and mandates. This
energy, which usually has fixed fuel costs for biomass and no fuel costs for
hydro, wind and other types of generation, is now desirable. To avoid the
problems with drought, countries such as Chile and Brazil are only allowing
hydro below 20MW (in Chile) and 30MW (in Brazil) to qualify for the renew-
able energy incentives and mandates [22 and 23]. By having smaller hydro
applications, the effects of drought could be minimized as installations would
be more dispersed.
Like privatization, each country has taken its own path towards promoting
renewables. These various schemes reflect the diversity in each country’s
philosophies and investment climate. A summary of these renewable energy
policies is provided in Table 28.3 above. Some common policies used widely
throughout the region of Latin America are to exempt renewable generators
from paying income taxes for a set number of years (usually five to ten) of
project operation and from paying import taxes. Also, mandates and financial
incentives for generation have been incorporated into most countries’ legisla-
tion in a variety of ways. The three main policies used to promote renewable
energy penetration in Latin American markets are described and discussed
below [24].
Pros and cons of renewable energy legislation

Renewable energy mandate
Renewable energy mandates oblige generators or distributors to source a
certain percentage of their generation from renewable sources. Binding
mandates outline target years for compliance; entities that do not comply by
that year face non-compliance fees that can serve to create a premium for
renewable energy. If the mandate authors have a goal of promoting a certain
type of technology, they can create a set-aside for specified technologies. These
set-asides require that a percentage of the overall renewable energy require-

ment be sourced from a given technology [25]. Currently, 25 US states and
Chile have voluntary or binding target percentages of renewables that electrical
generators must fulfil [26].
Renewable energy mandates can also be expressed in terms of MW capac-
ity additions. Uruguay, Brazil and the US state of Texas have adopted this
approach to supporting renewable energy. This technique successfully ensures
that a set amount of installations will be implemented, but fail to take into
account electrical growth rates. If the electrical growth rate is high, then a set
MW requirement could become insignificant.
Renewable energy mandates are more economically efficient than some of
the alternatives to promoting renewable energy as they allow market pressures
to lower the cost of generation. Like a competitive market, generators in a
market with a renewable energy mandate compete against each other to
provide the least-cost energy and engage in PPAs. This situation differs from
the feed-in tariff described below, which provides generators with a fixed price
for either their generation or capacity and does not encourage innovation to
reduce generation costs.
Despite these advantages to the mandate, there are also negative aspects to
mandates if they are not structured well. A mandate without set asides, which
necessitate that a portion of generation be sourced from a particular technol-
ogy, does not help promote a diversity of technology types. Also, some
administrative costs for monitoring and verification are imposed as regulated
entities must be checked for compliance [25].
Production tax credit

A production tax credit (PTC) is an alternative or supplemental instrument to
renewable energy mandates that can be a useful way to help renewables
compete with other types of generation technologies by providing the differ-
ence in generation costs. However, if not properly designed, PTCs can also be a
detriment to an industry. A PTC is a per kWh premium payment from the
federal government to generators. This payment is in addition to an energy
payment and often varies based on the type of generation. In the US, the PTC
for wind generation set at 1.9¢/kWh in 2008 has not been consistently
supported by the federal government and has therefore expired and been
renewed several times. The result of this inconsistent support is a periodic
boom and bust in the wind industry [27]. If a developer begins the process of
measuring wind speeds on a site, buying or renting the land, getting the requi-
site permits and sourcing the wind turbines, but does not begin generation on
the site before the PTC has expired, then he is not eligible for this economic
incentive. The time required to procure permits and turbines (especially during
this global turbine shortage period) is so uncertain that often wind and other
renewable developers cannot rely on the PTC. In the Latin American region,
only Argentina has adopted a PTC.
REGIONAL TRENDS 311
Feed-in tariff
Feed-in laws are yet another policy tool to promote renewable energy. These
laws require distributors to buy renewable energy at a fixed rate per kWh that
is higher than the average wholesale market price and usually close to the retail
price of electricity and the cost of generation. If the authors of the feed-in law
hope to promote a particular type of technology, then feed-in laws are struc-
tured to pay different rates for different types of renewables [25].
The main benefit of feed-in laws is that they provide assurance to banks
that generation will earn a given price and allow developers to more easily
access loans. Critics of feed-in tariffs say they are not an economically efficient
way to promote renewables. Giving generators a guaranteed set price for
electricity provides little incentive for innovation that would reduce generation
costs. In a regulatory system with feed-in tariffs, generators are not competing
against each other in an energy auction [25]. Another critique of feed-in tariffs
is that phasing them out as renewable technologies become more cost-competi-
tive can be problematic as generators rely on the preferred tariff for their
existence and financial viability. The tariffs are generally active until the
lifetime of the plants built under the tariff structure expires.
Germany, Denmark and the US, with its Public Utilities Regulatory Policies
Act (PURPA), have implemented feed-in tariffs [25]. Ecuador and Costa Rica
have adopted traditional feed-in tariffs while Peru recently pledged to cover the
difference between the cost of conventional and renewable generation in a
derivation of a feed-in tariff [28].
Comparison
There is no clear preferred renewable energy policy since some policies are
more appropriate for a given political environment than others. Chile has been
able to utilize a mandate because it has a stable economic climate and is ripe
for foreign investors that will compete in a least-cost bid process with other
renewable generators. Therefore, it is likely that the mandate, with penalties
for non-compliance, will be filled by competitive bids from renewable genera-
tors. Using a direct subsidy in Chile could have been more costly for
consumers, who ultimately usually bear the additional costs or savings for
renewable energy since there is no competition for generation.
Implementing a mandate in a politically and economically unstable
country like Nicaragua, on the other hand, may prove to be a failure. New
generators in Nicaragua may be hesitant to enter the marketplace until the
final moment before non-compliance fees are charged in a mandate. Non-
compliance fees in a politically unstable country may have to be set higher than
in a politically and economically stable country since investors will want to
have a higher rate of return given the risky environments. Also, there will
probably be less competition for new generation, and the few renewable gener-
ators that enter the market may be able to collude on prices, and charge a
premium for the energy that is close to the non-compliance fee, since there
is little competition. In this example, using a mandate rather than a direct
312 RENEWABLE ENERGY PROJECT DEVELOPMENT
incentive could lead to a lag in developer interest and may fail to create a
competitive marketplace where generators could pass on a minimal cost for
renewable generation to customers.
Ecuador may have recognized this phenomenon when it chose to imple-
ment a feed-in tariff to promote renewables. While perhaps not the most
elegant and efficient policy instrument, the feed-in tariff is probably appropri-
ate for this country given its economic crisis of 1998 and rapid succession of
presidential changes since 1995 [3]. The feed-in tariff provides a guaranteed
profit for generators that bolsters project finances and makes it easier to obtain
a loan from banks.
However, using a fixed feed-in tariff or PTC also has its dangers and does
not automatically stimulate development in a given sector. Countries with an
unstable currency are at risk of having the PTC and feed-in tariff being
meaningless if they are fixed in federal legislation that cannot be easily adjusted
to reflect devaluation. This situation occurred in Argentina in 2002 when the
Argentine peso was devalued by 30 per cent to the US dollar. The PTC was
reset years later in 2006 to 1.5 peso ¢/kWh for wind, hydro under 30MW,
biomass and geothermal, and 0.9 peso ¢/kWh for solar [29]. But the PTC now
fails to provide complete investor confidence as it could again become
meaningless if the currency is devalued.
Therefore, the best policy choice for each country is case- and site-specific.
The country’s current electrical sector structure, portfolio mix and investment
climate should be considered when making this decision.
Country-specific challenges
Beyond the privatization scheme selected and the renewable energy legislation,
the obstacles to Clean Development Mechanism (CDM) development in each
country are varied. In some cases they depend on the political and economic
history of a country, and in other instances they are contingent on renewable
resource availability and the past history of implementation, especially with
hydroelectric projects. The amount of support for renewable energy through
NGOs, national laboratories, regional organizations, development banks,
foreign governments and other entities can be wide-ranging, based on relation-
ships and existing organizational infrastructure. The Designated National
Authority ( DNA) office can have a huge bearing on the success of CDM
projects as it can be a partner or barrier to development. The role and partici-
pation of the DNA office in each country is summarized below in Table 28.4.
Summary
The lack of capacity additions due to the restructuring trial-and-error process,
vulnerability of nations to foreign fossil fuel resources, and El Niño/La Niña-
provoked droughts have provided an opportunity for renewable energy and
small-scale hydro. In response to these situations, most Latin American
REGIONAL TRENDS 313
Table 28.4 The role and participation of DNA offices in Latin American
countries
Office location Role
Argentina Separate office formed for promotion that will take 1% of CERs from projects it
helps; sustainable development criterion considers additionality of projectsa
Belize None
Bolivia Privately run office that will support itself through CER taxes of 15–35%; highly
developed websiteb
Brazil Regulatory function emphasized, but some capacity building done through seminars
and CDM guide; project documents must be completed in Portuguese for national
approvalc
Chile Poorly developed office that does not communicate well with project developers and
has little information on webpaged
Colombia Project must pass three committees which sometimes leads to delays; staff have
temporary posts which leads to turnover and inconsistencye
Costa Rica Staff were involved early in the climate change negotiations process but did not
succeed in helping to formulate CDM procedures that would benefit the country and
are therefore discouragedf
Dominican Rep. Created relationships with CER-buying partners early in processg
Ecuador Regulatory and promotion offices separated; promotion office is very developed;
projects visited individually with money from CER taxes of between 3 and 5%h
El Salvador Takes on strong promotion rolei
Guatemala Long history with CDM office which was established in 1996j
Honduras Potential division of CDM office by sector; staff upheaval with administration changesk
Mexico Staff of only two people limits office’s ability to promote and educate about projectsl
Nicaragua Staff upheaval with administration changesm
Panama Young staff with high turnovern
Peru Promotion and regulatory offices separated; promotion office is functional and
helpful; regulatory office has turnover with administration changes and is charged
with more than it can handle given its limited staffo
Uruguay Well-developed office with information for developersp
Sources:
a Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono, 20 November, Buenos Aires, Argentina
b Trujillo, R. (2008) Interview with R. Trujillo, Designated National Authority of Bolivia, 16 April
c Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An
assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, Washington, DC, 2
June
d CONAMA (n.d.) Cambio Climático, www.conama.cl/especiales/1305/propertyvalue-14612.html, accessed February 2008
e Bettelli, P., Garcia, A. and Graviator, S. (2007) Interviews with P. Bettelli, A. Garcia and S. Graviator, Designated National
Authority in the Unidad de Cambio Climatico de Ministerio del Medio Ambiente, Vivienda, y Desarrollo Territorial, 12 October
f Manzo, P. (2007) Interview with P. Manzo, Director General de Instituto Meteorológico Nacional (Costa Rica’s Designated
National Authority), 27 September, San José, Costa Rica
g Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An
assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, Washington, DC, 2
June
h Cornejo, J. (2007) Interview with J. Cornejo, Designated National Authority of Ecuador in the Unidad del Cambio Climático de
la Comisión Nacional del Medio Ambiente, 25 October, Quito, Ecuador
i Sanchez, I. A. (2006) ‘Estudio sobre la aplicación del mecanismo para un desarrollo limpio en El Salvador’, report for Ministerio
de Medio Ambiente y Recursos Naturales, La Cooperación Internacional de Japón and Universidad Centroamericana, June
j Castañeda, R. (2007) Interview with R. Castañeda, Designated National Authority of Guatemala, Ministerio del Medio Ambiente
y Recursos Naturales, 3 September, Guatemala City, Guatemala
k Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11
September, Tegucigalpa, Honduras
l Cervantes, H. (2007) Interview with H. Cervantes, Designated National Authority of Mexico, 29 August, Mexico City, Mexico
m Madriz, M. (2007) Interview with M. Madriz, Designated National Authority Assistant in MARENA, 19 September, Managua,
Nicaragua
n Cartin, Z. (2007) Interview with Z. Cartin, Member of the Designated National Authority team of Panama in Oficina del Cambio
Climático de ANAM, 3 October, Panama City, Panama
o Garcia, D. (2007) Interview with D. Garcia, Fondo Nacional del Ambiente Energy and CDM Specialist, 5 November, Lima, Peru
p Heuberger, R., Sutter, C. and Santos, L. (2003) Host Country Approval for CDM Projects in Uruguay: Application of a
Sustainability Assessment Tool, Swiss Federal Institute of Technology ETH, Institute of Environmental Physics, Energy & Climate,
and Ministry of Housing, Territorial Regulation and Environment of Uruguay, August
countries have recently created renewable energy incentives and are in the
process of revising these policies to make them more supportive. These renew-
able energy policies have associated advantages and disadvantages and should
be implemented in a site-specific manner. Other country-specific challenges and
opportunities, including the country’s DNA office, have played a role in
shaping the Latin American CDM development.
References
1 Rudnick, H. and Zolezzi, J. (2001) ‘Electric sector deregulation and restructuring
in Latin America: Lessons to be learnt and possible ways forward’, IEE
Proceedings: Generation, Transmission, and Distribution, vol 148, no 2, March
3 The Heritage Foundation and The Wall Street Journal (2008) ‘Index of Economic
Freedom’, www.heritage.org/index/country.cfm?id=Ecuador, accessed 14 April
2008
5 Renewable Energy and Energy Efficiency Partnership (n.d.) LAC Policy
Descriptions: Nicaragua, Sustainable Energy Policy Initiative, available at
www.oas.org/dsd/reeep/formularios/nicaragua_pb_reeep.doc
Honduras
7 Cardona, E. Z. (2007) Interview with E. Z. Cardona, Gerente General de Colegio
de Ingenieros Mecánicos Electricistas y Químicas (former director of AHPPER),
10 September, Tegucigalpa, Honduras
8 Pombo, C. (2001) ‘Regulatory reform in Colombia’s electric utilities’, The
Quarterly Review of Economics and Finance, vol 41, no 5, pp683–711
9 Joval, J. R. (n.d.) The Impact of the 1997–1998 El Niño on the Andean
Community of Nations, United Nations International Strategy for Disaster
Reduction, available at www.eird.org/eng/revista/No1_2001/pagina22.htm
11 Garcia, D. (2007) Interview with D. Garcia, Fondo Nacional del Ambiente Energy
and CDM Specialist, 5 November, Lima, Peru
12 Ministerio de Energía y Minas (Dirección de Electricidad) (1999) Ley que
Modifica Diversos Artículos de la Ley de Concesiones Eléctricas, 14 December
13 Ministerio de Energía y Minas (Dirección de Electricidad) (1998) Ley que
Modifica Diversos Artículos y Definición Anexa de la Ley de Concesiones
Eléctricas, 24 September
14 Ministerio de Energía y Minas (Dirección de Electricidad) (1999) Ley de
Promoción del Desarrollo de la Industria del Gas Natural, 3 June
15 Netherlands CDM Facility (2005) Poechos I Project Design Document, UNFCCC
16 Center for Energy Economics (2006) ‘Gas and power in Peru’, case study, Bureau
of Economic Geology, University of Texas at Austin, 27 March
REGIONAL TRENDS 315
17 Energy Information Administration (2008) ‘This week in petroleum’, newsbrief,

30 April
18 Frias, C. A. (2007) Interview with C. A. Frias, Especialista Area Ingeniería para
Colbún, 18 November, Santiago, Chile
19 Gomez, T., Enamorado, J. C. and Vela, A. (1994) ‘Feasibility studies of a power
interconnection system for Central American countries: SIEPAC Project’, Power
Engineering Review, vol 14, no 6, June, pp11–13
21 Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE 27
la Ley General de Servicios Eléctricos, Diario Oficial de la Republica de Chile,
13 March
23 do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, presentation at Centro
Clima: Centre for Integrated Studies on Climate Change and the Environment,
available through Renewable Energy Policy Network for the 21st Century at
www.ren21.net/pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy%
20Policy%5B1%5D.ppt
24 Lokey, E. (in press) ‘Renewable energy legislation in Latin America to ease depen-
dency on fossil fuels’, in Energy Policy: Economic Effects, Security Aspects and
Environmental Issues, in N. Jacobs (ed), Nova Publishers, Hauppauge, NY
25 Komor, P. (2004) Renewable Energy Policy, Diebold Institute for Public Policy,
New York
26 Bird, L., Dagher, L. and Swezey, B. (2007) ‘Green power marketing in the United
States: A status report’, 10th Edition, NREL/TP-670-42502, December, National
Renewable Energy Laboratory, Golden, CO
27 US Energy Information Administration (2005) ‘Production tax credit for
renewable electricity generation’, Issues in Focus report, available at
www.eia.doe.gov/oiaf/aeo/otheranalysis/aeo_2005analysispapers/prcreg.html
28 El Peruano (2008) Normas Legales: Decreto Legislativo (1002) de Promocion de
la Inversion para la Generacion de Electricidad con el Uso de Energías
Renovables, in 10219, 2 March
29 El Senado y Cámara de Diputados de la Nación Argentina (2000) Régimen de
Fomento Nacional para el Uso de Fuentes Renovables de Energía Destinada a la
Producción de Energía Eléctrica: Ley 26,190, in Boletín Oficial, 5 July
Section 4
Future Development
29
Stimulating Investment and
Overcoming CDM Barriers
This chapter presents potential solutions to the CDM barriers identified. These
solutions are organized by those who should implement them and then further
subdivided into the category of barrier addressed.
Project developers/investors
Technical
Many of the technical and social solutions to Clean Development Mechanism
(CDM) project implementation have been recognized by groups like Sandia
National Laboratories and NGOs like Practical Action that have been imple-
menting renewable energy projects for years. With regard to technical barriers,
some common-sense solutions that project developers could implement include
the following: (1) classes to build a group of local technology experts to
support projects on an ongoing basis and providing printed booklets of
maintenance with pictures and words; (2) the creation of a system for ordering
parts through the phone/Internet or making communities aware of how and
where to buy replacement parts for remote projects; (3) the inclusion of a
stockpile of replacement small parts in the budget of the project for remote
projects; and (4) the creation of strict quality control during construction.
In order to ensure that these general good-practice technical solutions are
heeded, the technical trouble-shooting procedures and policies listed in the
previous paragraph could be listed in the Project Design Document (PDD) as a
requisite part of the monitoring plan. Designated National Authority (DNA)
offices could offer these technical solutions to developers. Since it is in the
project owner’s best interest to ensure the successful operation of the project
and production of Certified Emission Reductions (CERs), project developers
may welcome these recommendations.
Social
Just as project developers could follow technical project implementation guide-
lines that large organizations such as Sandia National Laboratories and other
320 FUTURE DEVELOPMENT
NGOs follow, they also could follow the procedures for incorporating the
project in the community that have proven successful. Sandia has records of
how well each project was incorporated into each community and the subse-
quent success or failure of the project. Perhaps by reviewing these documents
prior to implementing the project, developers could anticipate problems and
take steps to avoid them.
Financial
In order to avoid the pitfalls described in Chapter 4, ‘Financial Barriers’,
project developers and investors could control CDM risks by utilizing Swiss
Re, RNK Capital LLC or other insurance products to ensure CERs are from
renewable energy projects and decrease investors’ concerns about their finan-
cial viability [1].
Host country governments / DNA offices

Social
Host country governments could provide incentives for projects developed
by local municipalities that are owned by communities and allow project
profits to be shared by all community members. To decrease conflicts that
occur with foreign project developers, host country governments could
require foreign developers to give a portion of project profits to the commu-
nity for specific development goals like school- or bridge-building, as
Panama proposes [2]. Alternatively, the host country government could
require that the local community be a part owner of projects in exchange for
the land and water permit. Host countries could follow Panama’s and
Colombia’s leads in offering an income tax deduction on the project if a
percentage of the CERs are reinvested in community development [3]. As in
Costa Rica, host countries could require developers to comply with the
International Standards Organization’s 14000 standards for environmental
responsibility [4].
The problem of stolen electricity, which poses a risk to project developers’
ability to profit from the projects they implement, must be addressed at the
national level, as Colombia and Peru have shown by creating incentives to
make a culture of paying for electricity bills. Host countries and domestic
energy companies must install better metering devices and system surveillance
to ensure that lines are not split and electricity stolen.
Another systemic social problem that host countries could help remedy
would be the issue of how to settle disputes over land and water deeds for areas
with renewable energy resources. Illegal land tenants that refuse to abandon
the land have caused headaches for developers. Each country could help solve
these problems by clarifying its domestic water permits and creating a policy
for how renewable energy developers should handle the eviction and relocation
of residents who do not own the land.
STIMULATING INVESTMENT AND OVERCOMING CDM BARRIERS 321
Financial
Since some project owners still have difficulty utilizing the future value of
CERs to boost their project’s pro forma and gain a loan, having the DNA office
explain the benefit and value of CERs to local banks, as FONAM of Peru has
done, could help educate local lenders about the value of carbon credits [5].
This type of education could also help state-run utilities to better utilize the
CDM as it could help regulators incorporate prospective CDM revenues in the
least-cost planning process.
Host country governments could help renewable energy projects overcome
general financial hurdles by benefiting from financing for feasibility studies as
CORFO of Chile has done [6]. The high cost of these feasibility studies
prevents projects from being developed since there is no guarantee that this
initial money invested will be recovered if the project isn’t implemented.
Host country’s DNA offices could structure incentives that provide
momentum for projects from the same developer or Designated Operational
Entity (DOE). Perhaps these projects would be exempt from or pay a lower
rate on the aforementioned tax. In this way, project developers would have
more of an incentive to embark upon the lengthy and complicated CDM
process.
Host countries could provide an environment that is favourable to CDM
development by reducing barriers to renewable energy interconnection with the
national grid such as excessive paperwork. Creating uniform interconnection
rules for CDM projects in order to entice foreign developers who are discour-
aged by country-specific regulation would also help reduce these barriers. The
host country could require power to charge uniform transmission and distribu-
tion rates to avoid overcharging potential renewable generators. The host
countries could also improve renewable energy economics without providing a
direct subsidy by eliminating the import tax on energy system components and
annual income tax on renewable energy generation [7].
In countries with a primarily state-run electrical sector, potential CDM
revenues could be required for consideration in future least-cost planning
processes to ensure that state utilities could still take a part in CDM projects. If
the CDM revenues were not earned and customers suffered from higher rates
due to a more expensive renewable energy generation having been imple-
mented instead of the least-cost generation, then a portion of the proceeds
from a tax that the DNA office implements on projects registered in the
country could help pay this cost difference.
Many countries in the region are not achieving their CDM potential
because they have short-term visions for their energy sector. The long-term
energy policy plans of host countries could incorporate CDM goals and
specific incentives to achieve these goals. Also, the CDM office should be one
that is permanent and continues despite frequent administration changes that
clear out the staff of governmental offices. Doing so would allow DNAs to
have long-term relationships with project developers, who sometimes work
through many administrations to develop a project. It also would allow for a
body of knowledge and experiences about the CDM to accumulate and

become useful to developers.
Informational
The amount of information about the CDM that is distributed is largely
controlled by the host country’s DNA office. DNA offices could be required
to take a small percentage of CERs revenues and allocate this taxed amount
to the advertising of CDM opportunities. Or, this CER tax could go into a
fund that provides economic incentives for local advertising and/or engineer-
ing firms that market the CDM opportunities. DNA offices could also use
this tax to supply each country with clear CDM registration guides in each
country’s official language. These guides could be distributed to the DNA
office, DOEs and local engineers and be updated annually to reflect changes
in CDM Executive Board decisions [8]. These revenues could also be used to
sponsor CDM workshops in developing countries for local engineering firms,
municipalities and local financing institutions [8], create webpages with
useful CDM information for project developers, and offer free legal assis-
tance to project owners involved in Emission Reduction Purchase Agreement
(ERPA) negotiations. Using some of the revenues to help project developers
in the initial stages of the CDM process, as Peru, Ecuador and Argentina
have done with their CDM promotion, offices would help clarify some of the
initial confusion over the CDM. DNAs could also be required to keep a
database of domestic CDM projects for project developers and carbon
financers to reference when establishing additionality, which often requires
that the project be a first-of-its-kind type [9]. If DNA offices also tracked and
disseminated information about CER prices, then project developers could
be better informed to make decisions about forward selling their CERs or
holding them for sale at a future date.
Since the revenues from CER sales would be skewed to favour those
countries with more CDM potential, perhaps host countries and NGOs could
pressure capacity building organizations like UNEP/Risø to provide equitable
support in the form of national strategy studies and barrier analyses to all
countries, regardless of their CDM potential.
Small scale
The host country could require generators to buy electricity from systems
under 15MW at a fixed price that is on average higher than the spot price,
offer tax breaks for utilities that buy renewable energy from generators under
15MW, require DNAs to keep an updated list of regional emission factors from
electrical generation to ease the baseline calculation for small-scale CDM
developers, and offer a financial bonus for each small CDM project that state-
run utilities have connected with their systems [9].
UNFCCC
Social
Basic guidelines to successfully incorporate a project into a community’s social
structure could avoid delays and system sabotage. The United Nations
Framework Convention on Climate Change (UNFCCC) CDM Executive
Board could help ease social tensions by creating basic guidelines for project
incorporation into society and conducting socialization sessions. The
UNFCCC could ensure that these guidelines are followed by having the verify-
ing DOE review the steps the developer took to incorporate the project in the
community and make an assessment of how well a system works within the
existing community structure.
Technical
To avoid the problem that has occurred with agro-industry methane capture
projects in Mexico, a better definition of what qualifies as a ‘proven technol-
ogy’ should be applied. Currently, only those technologies that are deemed
‘proven’ by the UNFCCC may be eligible for the CDM; however, the
UNFCCC’s guidance of what qualifies as ‘proven’ consists of only one terse
sentence that reads: ‘The Board agreed to indicate to the project participants
that project activities under the CDM shall make use of technologies which are
proven under field conditions and show general acceptance of the technology’
[10]. This definition provides project developers with little assistance since it
uses the word it is trying to define in the guidance statement. Since agro-indus-
try methane capture is a fairly new technology, that is still being refined for
various altitudes and weather conditions and not widely dispersed in developed
countries, perhaps this technology should not qualify as ‘proven’.
Financial
To reduce project failure risk and lack of CDM value after the Kyoto Protocol
ends in 2012, there is a need for the private sector to create an insurance
product for CERs generated in future years. Also, private sector pressure on
the Annex I countries to come to an agreement on the post-2012 rules at the
2009 Copenhagen Conference of the Parties could help provide the requisite
certainty that CERs will have a value in the future [7].
The UNFCCC could help stimulate development by setting targets and
incentives for DNAs and DOEs to be involved in a certain number of CDM
projects per year. The money for these incentives could be taken from the funds
collected from UNFCCC CDM project registration. These incentives could be
set in a way that ensures that the projects passed are of a high quality and
additional. Also, these incentives could be structured to account for a country’s
natural differences in CDM potential. The UNFCCC could also prompt project
development by lowering transaction costs by allowing monitoring and verifi-
cation to be done in random years instead of every year [11].
UNFCCC procedural and methodological

Several changes to the way in which methodologies are created and used could
avoid some of the CDM renewable energy barriers. The changes made to
methodologies at random times make it difficult for a project developer to trust
that it makes financial sense to engage in a CDM project since the alterations
to methodologies often drastically change project finances. Perhaps these
changes could be made less frequently or only be permitted once every two
years so that they would at least be predictable and allow project developers to
better plan their projects.
The way in which the current UNFCCC rules allow for selection of a build
and operating margin ratio and baseline calculation allows carbon brokers to
manipulate the UNFCCC system, claiming perhaps more emission reductions
than are really created. The choice of these factors should either be eliminated
or strictly overseen.
When proposing a new methodology, developers in Chile who worked on
the Chacabuquito Hydroelectric Project had the experience of their methodol-
ogy being approved but changed slightly to yield fewer reductions than they
predicted [12]. The UNFCCC should perhaps just reject or accept proposed
methodologies exactly as they have been written to avoid this problem.
Some countries with clean energy portfolios like Costa Rica’s have felt left
out of the CDM since they have the potential for few reductions. The
UNFCCC could base emission reduction calculations on the emission intensity
of the fuels for electrical generation listed in the short- and long-term national
energy plans. While these plans are not perfect and do not always portend the
precise future additions that are built, the plans may help provide a more
accurate picture of what the CDM project would be displacing in the future.
Using these plans of estimated capacity additions would provide more of an
incentive for countries with clean fuels in their historical growth but current
and future reliance on fossil fuels to utilize the CDM to promote renewable
energy additions that would not have otherwise occurred. However, safeguards
would have to be put in place to ensure that the expansion plans remained as
accurate as possible and plan authors did not falsely predict more fossil fuel
expansion just to be able to capture more CERs.
The UNFCCC must also decide how to handle imported energy in a way
that recognizes that imported fuels do have some carbon content. Perhaps
imported energy could utilize the country of origin’s average emission factor
for purposes of creating the national and regional grid emission factors of the
country using the energy. Then, the country exporting the energy could
annually tally the amount of energy exported and deduct the associated
emissions from its national and regional grid totals for purposes of an accurate
calculation of its own grid emission factors.
The new Programme of Activities (PoA) methodology has been under-
utilized, perhaps because of concerns over the ability of projects to
demonstrate additionality if they fulfil national and private sector initiatives.
Therefore, clear rules on how PoA projects can demonstrate additionality must
be formulated. And incentives for DOEs to be involved in PoA projects must be

created since DOEs must assume liability for PoA CERs issued in error.
Another major barrier due to UNFCCC regulations is the additionality
requirement. There is a need to create clear regulatory and financial additional-
ity guidelines that do not create a perverse incentive for countries not to
implement greenhouse gas-mitigating activities. One way to achieve this goal
would be to create a ‘positive list’ of pre-approved offset categories, as is used
in the Regional Greenhouse Gas Initiative in the US [13]. For example, one
type of project that is considered acceptable according to the positive list
approach in the Regional Greenhouse Gas Initiative is Landfills, which are not
subject to New Source Performance Standards therefore are not required by
law to install methane capture systems.
Other solutions to the additionality conundrum have been proposed. Some
CDM experts think that there should be a tax on each CER generated from
large projects or for projects that are not in line with the host country’s deter-
mination of sustainable development [14]. The tax could possibly go towards
development and operations of the country’s DNA office or advertising of
CDM opportunities and/or community development. Or the UNFCCC could
issue a different number of CERs for different gases/fuels [15]. This suggestion
would eliminate the allocation of CERs on a CO2-equivalence basis and
instead allocate reductions based on priorities set by the UNFCCC for sustain-
able development. The exclusion of industrial gases like HFC-23 or the
reduction of their significance in terms of emission reduction generation would
allow renewable energy projects to compete better in the CDM market.
The additionality criterion could be different for countries in distinct stages
of development. The requirements could be more stringent for projects in more
developed countries and less stringent in less developed countries. Countries
could be labelled and categorized in three groups, each of which has different
requirements, in order to promote more equitable project distribution in areas
like sub-Saharan Africa which have the the most poorly developed countries
and have received the least CDM development [16]. Alternatively, a sliding
scale of additionality that would provide fewer CDM revenues for projects
with less additionality could be utilized [17].
Finally, there is a dire need for the UNFCCC to create and adhere to
concrete sustainability goals [18]. Creating a definitive ‘sustainability’ defini-
tion would guide the rule-making and decisions that the UNFCCC makes as
well as give all host countries guidance on which projects to allow. The
creation of this definition could have the effect of eliminating industrial gas
projects to put renewable energy on a more level playing field.
Small scale
The UNFCCC could take several actions such as changing the small-scale
project size definition to overcome the barriers to small-scale project devel-
opment [19]. Some CDM experts have recommended increasing the size of
small-scale projects by factor of five to make them more economical [11],
defining ‘small’ by type of technology and application [19] and using a

sliding scale of ‘small’ with different levels and degrees of methodological
complexity.
The UNFCCC could also let small-scale projects be exempt from the
leakage requirement, which obliges the person creating the PDD to consider
emissions created outside of the project boundaries, known as leakage [20].
The UNFCCC could provide exemption of small-scale projects from having to
pay the climate change adaptation levy tax of 2 per cent that applies to all
CERs generated [20]. To reduce transaction costs, small-scale projects could be
exempt from having to redo the PDD after each crediting period [20].
The UNFCCC could stimulate project type diversity by imposing changes
to methodologies. More relaxed methodologies for distinct project types,
especially solar and wind, might instigate more development in these sectors.
The UNFCCC could create more simplified bundling rules for solar, wind and
biomass projects under one PDD since doing so now constitutes as much work
as doing separate PDDs for all of these projects. Allowing projects like wind
and solar generation that have low capacity factors of below 50 per cent to
qualify as small scale even if their capacity rating were closer to 30–50MW,
rather than the current small-scale definition of 15MW, would be more appro-
priate for these technologies. Making this adjustment would put small-scale
wind and solar projects on a level playing field with small-scale biomass and
hydro projects that have capacity factors closer to 85 per cent.
For off-grid projects that have baseline emission calculations that are diffi-
cult to predict, because they depend on a combination of firewood, kerosene,
car battery and diesel generation use, an average emissions factor that each
technology replaces could be used. For example, solar home systems usually
replace fuel wood or kerosene with an emission factor of 0.233 tonnes of CO2
for the amount of energy a 50W panel can provide per year [21]. Also, for
these systems, a future predicted emissions factor could be used as a baseline
instead of historical emissions because diesel generator sets, car batteries or the
grid will soon serve many rural communities that currently use biomass or
kerosene for energy needs [22].
Conclusion
The solutions proposed in this chapter are by no means comprehensive, but
instead meant to serve as a starting place. Many of the solutions proposed
would require large, systemic changes in host country governments in order to
remedy the problem. Others could be dealt with by simple modification of the
UNFCCC rules or host country DNA office policies. As experience with the
CDM grows and project developers / carbon brokers advocate these changes
from the UNFCCC and DNA offices, there is hope that these solutions could
be implemented.
References
1 RNK Capital and Swiss Re (2006) ‘RNK Capital and Swiss Re structure first
insurance product for CDM carbon credit transactions: Insurance instrument
mitigates Kyoto-related transaction risk for global carbon credit trading’, press
release, 13 June
3 Fernandez, O. (2007) Interview with O. Fernandez, Departamento de Generación
de Empresas Públicas de Medellín, 18 October, Medellín, Colombia
4 Alvarado, M. (2007) Interview with M. Alvarado, President of Asociación
Costa Rica
6 Garcia, J. (2007) Interview with J. Garcia, Chilean Economic Development
Agency (CORFO) Renewables Coordinator, 16 November, Santiago, Chile
7 Dankers, A. (2001) Presentation at ‘Small is feasible: Designing small-scale CDM
projects’, side-event at UNFCCC COP-7, 6 November, Marrakesh, Morocco
8 Michaelowa, A. (2005) ‘Creating the foundations for host country participation in
the CDM: Experiences and challenges in CDM capacity building’, in F. Yamin (ed)
9 Michaelowa, A. (2005) ‘Determination of baselines and additionality for the
CDM: A crucial element of credibility of the climate regime’, in F. Yamin (ed)
10 CDM Executive Board (2006) ‘Guidance on proven technologies’, para 71, Report
of the Twenty-Fifth Meeting of the Executive Board, 28 July
11 Grütter, J. (2001) Presentation at ‘Small is feasible: Designing small-scale CDM
when a CDM project displaces a reservoir hydro power plant’, report, 25 July
13 Regional Greenhouse Gas Initiative Model Rule, 5 January 2007, available at
www.rggi.org/docs/model_rule_corrected_1_5_07.pdf
14 Zhang, Z. X. (2007) ‘Toward an effective implementation of clean development
mechanism projects in China’, Energy Policy, vol 35, pp1088–1099
15 Wara, M. (2006) ‘Measuring the Clean Development Mechanism’s performance
and potential’, Working Paper #56, Program on Energy and Sustainable
Development, Stanford University, Stanford, CA
16 Tanwar, N. (2007) ‘Clean Development Mechanism and off-grid small-scale
hydropower projects: Evaluation of additionality’, Energy Policy, vol 35,
pp714–721
17 Chomitz, K. M. (1998) ‘Baselines for greenhouse gas solutions: Problems,
precedents, and solutions’, report for the Carbon Offset Unit, Development
Research Group, World Bank, 16 July
18 Muller, A. (2007) ‘How to make the Clean Development Mechanism sustainable:
The potential of rent extraction’, Energy Policy, vol 35, issue 6, pp3203-3212
19 Sutter, C. (2001) Presentation at ‘Small is feasible: Designing small-scale CDM
20 Ecosecurities (2002) ‘Clean Development Mechanism: Simplified modalities and

procedures for small-scale projects’, Final Report for the Department for
International Development, May
21 Martens, J. W., Kaufman, S. L., Green, J. and Nieuwenhout, F. D. J. (2000)
‘Towards a streamlined CDM process for solar home systems: A review of issues
and options’, report by Energy Innovation, Sunrise Technologies Consulting and
IT Power, November
22 Ley, D. (2007) Interview with D. Ley, United Nations Consultant, Economic
Commission for Latin America and the Caribbean, Mexico subregional office,
Energy and Natural Resources Unit, 21 April
30
Summary of CDM Barriers
Major themes
This book has endeavoured to address the barriers to Clean Development
Mechanism (CDM) renewable energy projects at both thematic and country-
specific levels. The major themes of each barrier category are described briefly
in this section. As mentioned in the ‘Executive Summary’ of this book, the two
largest barriers for project implementation relate to the openness of the electri-
cal market and willingness of state-run utilities to work with independent
power producers (IPPs). Usually, state-run entities are reluctant to become
involved in CDM projects because of their unfamiliarity with the Mechanism,
lack of an incentive to earn extra profit because of the regulated nature of their
tariff structure and profit margins, and the complications these entities have
with proving regulatory and financial additionality. Therefore, it is only the
IPPs that can successfully promote CDM activities; if the country prohibits or
limits IPP involvement in generation, then renewable energy CDM projects will
usually not succeed in that country.
The next major barrier relates to the CDM rules that provide a disincentive
for CDM host countries to address climate change with domestic policies. A
country’s renewable energy legislation can be both a blessing and a curse for
renewable energy development as it can provide additional financing or a
mandate requiring renewable generation, but it can also complicate the process
of showing project additionality. As the UNFCCC CDM rules currently stand,
Project Design Document (PDD) authors must acknowledge these incentives
and mandates when proving additionality, and this acknowledgement often
undermines the additionality argument.
The other major barriers that have been identified in this book are related
to technical, social, financial, informational and small-scale-specific issues. The
renewable energy technologies (other than hydro) in the region suffer from a
lack of experience and are therefore unproven in the hurricane-prone climates
of Central America and intermittent wind regimes of Oaxaca, Mexico and
Patagonia, Argentina and Chile. Socially, CDM activities, especially landfill
and hydro projects, are not always beneficial to the community and cause
controversy among locals and headaches for developers. Financially, CDM

revenues, in and of themselves, do not provide enough money to prompt devel-
opment; therefore, some non-additional projects achieve registration, and a
lack of ‘real’ greenhouse gas reductions results. Other times, renewable energy
projects that would make ‘real’ reductions because they are not financially
viable cannot rely on Certified Emission Reductions (CERs) to bolster project
finances since there is risk in earning the CERs and the price of a CER is not
sufficient. Informational barriers result from the Mechanism being better
known in some, more developed, areas than others. Also, carbon brokers,
Designated National Authority (DNA) offices with a commitment to promo-
tion activities, and capacity building institutions are not found ubiquitously
throughout the region, causing a discrepancy in access to CDM information
and experts. Host country institutional barriers arise because of poorly created
or restructured energy policies that do not provide adequate incentive for
private investor participation or with rules that are complex and change often.
Also, the renewable energy legislation of these countries is sometimes inade-
quate to promote development. The UNFCCC’s complex and changing
methodologies and procedures are a formidable barrier to developers. Finally,
small-scale projects suffer most from not being able to generate enough
emission reduction revenues to cover the high registration transaction costs.
Comprehensive renewable energy barriers for CDM

development in Latin America
Table 30.1 Technical barriers
Type Main points

General Voltage fluctuations; grid outages; overtaxed transmission lines
Hydro Hard to access; inclement weather; first-of-a-kind technology hard to prove;
projects over 20MW for EU sales must complete more registration steps
Wind New and unproven for region; grid hook-in not always convenient; grid
instabilities; intermittency in Patagonia; permit problems; turbine shortage
Biomass High transport costs; contracts for year-round generation are difficult if relying
on a crop with a harvest cycle
Geothermal High first costs; poor plant operations that deplete resource
Landfill Difficulty coordinating various municipalities; unlined and unsorted dumps
methane use yield low gas amounts; stolen piping
Agro-industry pH, water content, 25–30° Celsius, and low antibiotic requirements for
methane use biodigesters are hard to meet; flare not consistently lit; coordination of
turbines and flare could be difficult
SUMMARY OF CDM BARRIERS 331
Table 30.2 Social barriers
Category Main points

Stolen electricity Rich and poor neighbourhoods; neither distributor nor police can enforce
Site security Stolen parts
Permits Those living on land do not have deed and require relocation
Developer Inherent prejudices of developers, NGOs, and locals based on experience of
relationships previously implemented systems
Community Community support usually necessary for CDM projects; new issues could
resistance arise with Programme of Activities for rural areas
Landfills: garbage collectors left without jobs
Hydro: dislocated people, wild rivers and source of water jeopardized
Table 30.3 Financial barriers

Renewable Feasibility studies unfunded; long payback of the projects due to high initial
energy-specific cost; perception of high risk for some technologies
Political/financial Wars with other countries and internal strife; devalued money; maximized
instability foreign debt from development banks
Low carbon prices In general: most projects not additional because prices too low to stimulate
development just for CDM revenues
Development Banks: some funds reserved for public entities; institutional
rigidities; low carbon prices
CDM-specific Penalties for not producing a certain number of CERs; questions of legal
authority for contracts; language barriers in contracts and negotiations with
foreign carbon brokers; price information of CERs not always available;
refinance schemes have questionable additionality
Table 30.4 Informational barriers

DNA office Promotion and regulation are not always balanced; some DNA offices add
unnecessary layers of complexity to the process; lack of coordination between
entities in DNA; CERs sometimes taxed
Other support Consists of UN organizations, development banks, industry associations,
networks non-governmental organizations, governmental laboratories, regional organi-
zations, carbon brokers and universities
Emission Contract terms; CER prices; language and understanding barriers
Reduction Purchase
Agreements
Table 30.5 Host country institutional barriers

Lack of long-term Trial-and-error energy policy; short-term capacity additions elicited; limits on
policies PPA length
Administration Lack of continuity in policies, programmes and personnel
changes
Market openness Limits on IPP participation; lack of state-run utility participation in CDM
Table 30.6 UNFCCC procedural and methodological barriers

Unstable CDM Uncertainty after 2012; CER saturation in market
market
Methodology Utilization of incorrect methodologies
confusion
Low emission Countries with clean generation have little potential for reductions
factors
Imported energy Counted as zero for emission reduction purposes
Adjusting the Yields different numbers of CERs but is dependent on year-to-year generation
build and mix
operating margin
Adjusting Expensive and sometimes does not result in expected outcome if slightly
methodologies changed by CDM Executive Board
Changing Developers and PDD authors are prepared to use certain methodology and
methodology then must readjust as methodologies change
Regulatory and Difficult for state-run utilities to prove
financial
additionality
Availability of Increases project costs if foreign firm is contracted
DOEs and carbon
brokers
Table 30.7 Small scale barriers

Existing Insufficiently simple for very small projects
methodology
Programme of Has not yet been attempted
Activities
Transaction costs Small industries or countries with low emission factors are at a disadvantage;
VERs are an alternative, but command lower price
Country-specific Average grid emission factor studies for small-scale development; El Salvador,
support/ Costa Rica, Guatemala, Chile and the Dominican Republic have legislation that
disincentives supports; Colombia and Ecuador have legislation that adds barriers
Country-specific challenges
Within each country in Latin America, the prospects for the CDM are unique.
Varying political structures, economic stability, generation mixes, renewable
energy legislation, capacity-building institutions and other factors have led to
the current landscape of CDM projects. Some generalizations about the region,
however, can be made.
Most countries in the region have privatized their energy sector since the
1990s. These experiments in privatization have had drastically different
results, ranging from well-designed systems that incite adequate private sector
participation, lower customer prices and better system performance to systems
that have had to be modified several times with new legislation or revert to
being state-run institutions in order to instigate adequate new capacity
Table 30.8 Country comparisons: Summary1

Country Electricity rate Emission factor % or degree Biggest Best
(residential (tonnes of generation challenge opportunity
¢/kWh)a CO2/MWh) privatizationb
Argentina 3.86 0.49 80% Financiers wary Tax credits for
of investing after renewable energy
2002 economic (RE); capacity
collapse needed
Belize 44 n/a None, even State-run High electricity
though company a prices
permitted by law monopoly
Bolivia 6.1 0.581 100% CERs taxed heavily Highly developed
by the DNA office; national DNA office;
low electricity price plentiful resources
Brazil 14.3 0.262 26% Local component Huge industries,
requirement for constant demand,
renewable energy carbon broker
implemented under interest
new law
Chile 10.9 0.358 100% Grids not New RE mandate;
interconnected; good investment
low emission factor climate
Colombia 9.7 0.385 57% Negative image for Abundant resources;
investment good recent market
and governance
Costa Rica 6.9 0.488 12% State utility Good investment
dominates; low climate; excellent
emission factor resources
Dominican 13.9 0.7061 83% Poorly run New RE law provides
Republic distribution strong support;
network; little huge wind potential
CDM experience
Ecuador 9.7 0.64 Little Generators not High feed-in tariffs
certain to get paid by
distributors because
of black losses and
low fixed tariffs
El Salvador 13.8 0.612 Advanced Small country with High electricity
incremental prices and many IPPs
capacity needs in market
Guatemala 15.1 0.824 68% Political instability Open market with
many incentives for
renewables
Honduras 8.3 0.74 65% Price caps on New RE law with
amount RE can aggressive incentives;
earn capacity needed
Mexico 8.4 0.6 19% Public utility’s Good resources and
dominance and investment climate;
policies high emission factor
Nicaragua 12 0.709 69% Political instability; Capacity needed
lack of CDM
knowledge
Panama 14.9 0.556 89% Fewer resource Open market;
opportunities aggressive incentives;
high price of elect-
ricity; capacity needed
Peru 4.34 0.54 66% Natural gas promotion Abundant resources;
laws and hydro laws new RE legislation
make an ambivalent could help promote
climate for investors projects
Uruguay 11.7 0.2 None, even Little CDM Current elicitation
(estimated) though permitted experience; lack of for RE
by law long-term policy
commitment to RE
Source:
a World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the
Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/
b ESMAP (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and
challenges’, 15 June, Energy Sector Management Assistance Programme, World Bank, Washington, DC
additions and keep prices reasonable. Recently, rising fossil fuel prices have led
several countries to implement new renewable energy legislation to stabilize
energy prices. These new laws are being passed and revised so frequently that
one must keep monthly tabs on each country to track these changes. The
variety in renewable energy legislation, privatization schemes, political and
economic histories, institutional support and indigenous renewable and fossil
fuel resources has created a unique set of barriers and opportunities in each
country. A summary of each country’s suitability for CDM development is
provided in Table 30.8 above.
Comprehensive list of solutions to barriers
Table 30.9 Solutions for project developers
Technical Train local experts; create system for ordering parts; include a budget for
replacement parts; create strict quality control; and include technical best
practices in monitoring plan
Social Follow documented best practices of groups experienced with Latin American
RE development
Financial Utilize a CER insurance product to ensure delivery
Table 30.10 Solutions for host country governments / DNA offices
Social Provide incentives for municipalities to develop projects; mandate that

communities be part owners of projects in exchange for water or land permit;
offer income tax exemptions if some CERs are reinvested in community; have
companies comply with international standards for environmental
responsibility; create incentives to stimulate a culture of paying for electricity;
and make a policy for how developers should handle land and water permit
disputes
Financial Have DNA office explain value of CERs to local banks; provide money for
feasibility studies; create incentives for the same developer or DOE to engage
in more than one CDM project; reduce excessive paperwork for renewable
energy interconnection in grid; require power wheelers to charge uniform
transmission and distribution rates; eliminate the import tax on system
requirements and annual income tax; require CDM revenues to be included in
future state-run least-cost planning processes; and incorporate CDM in the
long-term energy policy strategy
Informational Have DNA offices take a small percentage of CERs and use it for advertising,
assisting project developers in the early CDM stages, and the creation of clear
registration guides in the host country language, CDM workshops, CDM
webpages, CDM databases and CER price guides. Host countries could also
pressure CDM capacity building organizations for equal access to information.
Small scale Require generators to buy from systems under 15MW at a fixed price that is
higher than the spot price; offer tax breaks for utilities that buy renewable
energy under 15MW; require DNAs to keep a list of emission factors for
simplified small-scale project baseline calculation creation; and offer a financial
bonus for small-scale projects that state-run utilities connect to their grid
Table 30.11 Solutions for the UNFCCC
Social Create basic guidelines for social incorporation of project and make
verification of these steps part of the verification process
Technical Provide a better definition of ‘proven technology’
Financial Create an insurance product that guarantees the value of CERs generated in
future years and create incentives for DNAs and DOEs to be involved in a
certain number of high quality projects each year
UNFCCC Make changes to methodologies at a few, designated times; oversee or
procedural and eliminate the selection of baselines and build/operating margin ratio; accept
methodological proposed methodologies only exactly as they are submitted; provide a way to
consider the future emissions from new capacity additions in calculating the
emission reductions produced that is perhaps based on the country’s future
energy plan; provide clear guidance on how PoA must demonstrate
additionality; give incentives for DOEs to be involved in PoA projects; create
clear additionality requirements that do not create a perverse incentive for
non-Annex I countries not to address climate change with domestic legislation
that is perhaps based on a ‘positive list’; allocate CERs based on how close the
project comes to achieving the host country’s definition of sustainable
development; issue CERs based on the gas mitigated; have a sliding scale of
additionality for countries in different stages of development; and create a
definition of ‘sustainable’
Small scale Change the definition of small scale; make small-scale projects exempt from
the leakage requirement; offer a more relaxed methodology for some under-
represented technologies; allow technologies with low capacity factors to
qualify as small scale with higher capacity ratings; use an average emission
factor for off-grid projects with difficult-to-determine baseline calculations;
and consider using a future emission factor for off-grid projects that will have
future needs met by either the grid or diesel generators
Note
1 Citations for the information in this table (except for the columns labelled ‘electric-
ity rate’ and ‘% or degree of generation privatization’) can be found in each
country-specific chapter.
Index
Acción Ecológica 220 Approved Methodologies (AMs) 114–15

ACMs see Approved Consolidated Argentina 151–7
Methodologies background 151–3
ACR see Ambiente de Contracao biomass projects 49
Regulado carbon brokers 155
additionality 11, 14, 244 challenges/opportunities 153–5
biodigester projects 59 Designated National Authorities
financial barriers 80, 83 153–4
hydro energy 20, 44 financial barriers 77
informational barriers 90, 91 informational barriers 88, 89, 90, 91
methodological barriers 111–12, institutional support 154–5
117–21 legislation 153
small-scale barriers 129, 135–6 portfolios 153
AgCert 55, 57, 58, 60, 96–7, 135 privatization 151–3
AGER see Asociación de Generadores de renewable energy potential 155
Energía Renovable vital statistics 151
agro-industries 53–61 wind energy 21
AHPPER see Asociación Hondureña de Asia 10, 15–16
Pequeños Productores de Energía Asociación de Generadores de Energía
Renovable Renovable (AGER) 93
Aislado grids 162 Asociación Hondureña de Pequeños
allowances 3, 5–6, 7, 11, 83, 109 Productores de Energía Renovable
see also EU Allowances (AHPPER) 93
Ambiente de Contracão Regulado (ACR) Australia 109–11
170
AMs see Approved Methodologies bagasse 48–50
anaerobic lagoons 54–5 Bahamas 300
Andean Carbon Hubs 89 ‘Bali Action Plan’ 7
Andean Center for Environmental banking 79–83, 92–3, 253
Economics (CAEMA) 91, 112 see also World Bank
Annex I countries 3–4, 5, 7 Barbados 300
financial barriers 82 barriers 4–5, 11, 13, 181–2, 319–28
industrial gas mitigation projects 8, 10 financial 75–86, 320, 321–2, 323
methodological barriers 109–10 informational 87–100, 322
small-scale barriers 135–6 institutional 101–8
approval processes 12, 13, 14, 15, 90 methodological 109–26
see also validation processes small-scale 127–44, 322, 325–6
Approved Consolidated Methodologies social 65–74, 319–20, 323
(ACMs) 114–15, 116 technical 43–64, 319, 323
baseline emission calculations 12, 14, 48, bundling mechanisms 55, 129–30, 131,
112–15, 119–20, 129–30 135
BEL see Belize Electricity Limited
Belize 159–68 CAEMA see Andean Center for
background 159–60 Environmental Economics
challenges/opportunities 160 CAF see Corporacíon Andina de
institutional barriers 106 Fomento
portfolios 160 Canada 109–10, 111
privatization 159–60 Capacity Development for the CDM
vital statistics 159 (CD4CDM) 92
Belize Electricity Limited (BEL) 159–60 carbon brokers 6–7, 11, 12, 13
Berlin Geothermal Power Plant 21 Argentina 155
biodigesters 54–60, 120, 255–6 Bolivia 164
biofuels 172–3, 245 Brazil 173
biomass projects 23, 48–50, 67, 103, Chile 182
245, 246 Colombia 191
Chile 180 Costa Rica 201
Costa Rica 201 country-specific profiles 150
Ecuador 217 Dominican Republic 210
El Salvador 227 Ecuador 219
Honduras 245, 246 El Salvador 227
Blackout Reduction Programme (PRA) Emission Reduction Purchase
208 Agreements 97, 98
boilers 48, 49 financial barriers 78–9, 80, 82–3
Bolivia 161–8 Guatemala 235
background 166 Honduras 246
carbon brokers 164 informational barriers 96–7
challenges/opportunities 163–6 methodological barriers 112, 113, 114,
informational barriers 91 122
institutional support 164 Mexico 257
legislation 162 Nicaragua 268
methodological barriers 114 Panama 274
portfolios 163 Peru 284
privatization 161–2, 166 small-scale barriers 132–3
renewable energy potential 164 social barriers 72
vital statistics 161 Uruguay 292
Brazil 169–76 carbon dioxide 51, 56, 57
background 169–70 see also greenhouse gases
carbon brokers 173 carbon markets 5–6, 257
challenges/opportunities 172–5 financial barriers 78–9, 80, 81, 83
Designated National Authorities 172 methodological barriers 109, 110,
institutional barriers 103 111
institutional support 172–3 Caribbean countries 298–300
legislation 170–1 CD4CDM see Capacity Development for
methane capture 22 the CDM
portfolios 171–2 CDE see Corporación Dominicana de
privatization 169–70 Electricidad
renewable energy potential 173–4 CEL see Comisión Hidroeléctrica
vital statistics 169 Ejecutiva del Río Lempa
bribery 67 Central National Grid (SIN), Bolivia
build margin adjustments 113–14 162
INDEX 339
Centro de Estudios del Sector Privado Cleaner Production Centres 234

para el Desarrollo Sustentable Clean Technology Fund 81, 93
(CESPEDES) 257 climate change 3, 7–8
Centro de Producción más Limpia 234 development banks 92–3
CERs see Certified Emission Reductions methodological barriers 118–20
certification bodies 133–5 United Nations organizations
certified emission reductions (CERs) 3, 4, 91–2
5–17, 53–4 Climate Change Consultative Committee
Bolivia 163, 164–5 (OCIC) 201
Brazil 173–4 Climate Investment Funds (CIFs)
Chile 183 financial barriers 81–2
Costa Rica 202–3 informational barriers 93
financial barriers 78–9, 80–1, 82–3 closed flares 116
Honduras 244 closed markets electricity 106
hydro projects 45 Cochabamba 166
informational barriers 91, 97 coffee farms 23
institutional barriers 107 co-firing 49–50
methane capture 60 Colombia 187–96
methodological barriers 109–11, 112, background 187–8
113–15, 117–18, 119 carbon brokers 191
Mexico 255–6, 258–60 challenges/opportunities 189–93
small-scale barriers 128, 132–3, 134, Designated National Authorities
135, 136, 137–8 189–90
Certified Emission Reduction Unit financial barriers 77
Procurement Tender (CERUPT) 82 informational barriers 89, 90, 96
CESPEDES see Centro de Estudios del institutional support 190–1
Sector Privado para el Desarrollo landfill gas projects 22, 70
Sustentable legislation 188–9
CFE see Comisíon Federal de portfolios 189
Electricidad privatization 187–8
Chacabuquito 114–15, 183–4 renewable energy potential 192
Chile 177–86 small-scale barriers 137
background 177–8 social barriers 70, 71–2
carbon brokers 182 vital statistics 187
challenges/opportunities 181 Comisíon Federal de Electricidad (CFE)
Designated National Authorities 181 20, 117–18, 251, 252, 254–5,
institutional barriers 103–4, 106 258–62
institutional support 181–2 Comisión Hidroeléctrica Ejecutiva del
legislation 179 Río Lempa (CEL) 223–4
methodological barriers 114–15 Comissão Interministerial de Mudança
portfolios 180–1 Global do Clima (CIMGC) 172
privatization 177–8 communication 58, 70–1
renewable energy potential 181 community acceptance/resistance 67–9,
small-scale barriers 137 70–1, 219–20, 236
vital statistics 177 community development 80–1
The Chilean Economic Development Consejo Nacional de Electricidad
Agency (CORFO) 181–2 (CONELEC) 214, 215, 219
China 10 Consejo Nacional del Ambiente
CIFs see Climate Investment Funds (CONAM) 112, 282–3
CIMGC see Comissao Interministerial de consultants 14–15, 96–7
Mudança Global do Clima see also carbon brokers
CORDELIM see Oficina Nacional de Brazil 172

Promoción del Mecanismo de Chile 181
Desarrollo Limpio Colombia 189–90
CORFO see Chilean Economic Costa Rica 200–1
Development Agency Dominican Republic 210
Corporacíon Andina de Fomento (CAF) Ecuador 218
79, 80, 92 El Salvador 226
Corporación Dominicana de Electricidad Guatemala 234
(CDE) 207–8 Honduras 245
corruption 67–8 informational barriers 87–91
Costa Rica 197–206 institutional barriers 105
backgrounds 197–9 methodological barriers 112
biomass projects 23 Mexico 256
carbon brokers 201 Nicaragua 267
challenges/opportunities 200–4 Panama 274
Designated National Authorities Peru 282–3
200–1 small-scale barriers 137–8
geothermal projects 21 Uruguay 291–2
institutional barriers 102–3, 104, 105, Designated Operational Entities (DOEs)
106 11, 12, 14–15, 121, 122
institutional support 201 Det Norske Veritas (DNV) 112, 122
landfill gas projects 22, 52, 53, 70 development banks 92–3
legislation 199, 203 digesters see biodigesters
methodological barriers 112, 117, distribution 65–6, 213–14, 232
118–19, 120 DNAs see Designated National
portfolios 200 Authorities
privatization 197–9, 202–3 DNV see Det Norske Veritas
renewable energy potential 202 DOEs see Designated Operational
small-scale barriers 132–3, 136–7 Entities
social barriers 66, 70, 71 domestic institutional support
vital statistics 197 Argentina 154–5
wind energy 20 Bolivia 164
Costarricense de Electricidad (ICE) Brazil 172–3
197–8, 202–3 Chile 181–2
country-specific profiles 147–301 Colombia 190–1
Cristalería Toro 180–1 Costa Rica 201
Cuba 299 Dominican Republic 210
Ecuador 218
dairy farms 58, 255–6 El Salvador 226–7
dams Guatemala 234–5
Chile 179, 183 Honduras 245
Honduras 248 Mexico 257
hydro projects 45 Nicaragua 267
methodological barriers 114–15 Panama 274
Mexico 260, 262 Peru 283–4
small-scale barriers 136 Uruguay 292
desalination plants 80–1 Dominican Republic 137, 207–12
Designated National Authorities (DNAs) background 207–8
11, 12, 14, 15, 149, 320–2 carbon brokers 210
Argentina 153–4 challenges/opportunities 210–11
Bolivia 163 Designated National Authorities 210
INDEX 341
institutional support 210 Agreements (ERPAs) 82–3, 97–8

legislation 208–9 Emission Reduction Units (ERUs) 83,
portfolios 209–10 110, 111
privatization 207–8 Empresa Nacional de Electricidad
renewable energy potential 210 (ENDE/ENEL) 107, 161
vital statistics 207 Empresa Nacional de Energía Eléctrica
drilling 51 (ENEE) 241–3, 246–7, 248
dumps 52–3, 69 Empresas Públicas de Medellín (EPM)
see also landfill gas projects 53–4, 80–1, 83, 191
Empresas Varias de Medellín 71–2
EB see Executive Board ENDE see Empresa Nacional de
Ecoelectric 49 Electricidad
Ecoinvest 132–3 ENEE see Empresa Nacional de Energía
economic instability/stability 15, 16, Eléctrica
77–8, 165, 219 ENEL see Empresa Nacional de
Ecosecurities 89 Electricidad
Ecuador 213–22 Environmental Impacts Statements (EISs)
background 213–15 155
carbon brokers 219 environmentalists 69
challenges/opportunities 218–20 EPM see Empresas Públicas de Medellín
Designated National Authorities 218 ERPAs see Emission Reduction Purchase
financial barriers 78 Agreements
hydro projects 69 ERUs see Emission Reduction Units
illegal activity 65–6 ETSs see European Trading Schemes
informational barriers 88–9, 90, 91 EU Allowances (EUAs) 5–6, 83, 109
institutional support 218 eucalyptus trees 49
landfill gas projects 52–3 European Trading Schemes (ETSs) 5, 6,
legislation 216 11
portfolios 217 excrement-based methane capture see
privatization 213–15 hog farms
renewable energy potential 219 Executive Board (EB) 12, 15, 118–19
small-scale barriers 137–8
social barriers 65–6, 69, 71 feasibility studies 14, 75, 181–2
vital statistics 213 Fedepalma 53
EISs see Environmental Impacts feed-in tariffs 170, 199, 216, 310–11,
Statements 312
El Coronado 67, 248 fertilizer 49
El Salvador 223–30 financial barriers 75–86, 320, 321–2,
background 223–4 323
carbon brokers 227 financial instability/stability 15, 16,
challenges/opportunities 226–7 77–8, 165, 219
Designated National Authorities 226 flares 22, 51–2, 57, 58, 116, 128
geothermal projects 21 Fondo Nacional del Ambiente (FONAM)
institutional support 226–7 89, 282–3
legislation 224–5 ‘free-riders’ 135–6
portfolios 225–6 French Guiana 300
privatization 223–4
renewable energy potential 227 generators
small-scale barriers 136 Argentina 152
vital statistics 223 Colombia 188
Emission Reduction Purchase Costa Rica 202–3
Ecuador 214–15 GVEP see Global Village Energy

financial barriers 75–6 Partnership
Guatemala 232
Honduras 242, 246–7 HFCs see hydrofluorocarbons
illegal activity 65–6 hog farms 54–7, 59–60, 255–6
institutional barriers 105–7 Emission Reduction Purchase
landfill gas projects 51 Agreements 97
methane capture 58–9, 60 informational barriers 96
Mexico 253 methodological barriers 120
small-scale barriers 137 small-scale barriers 135
technical barriers 43–4, 51, 58–9, 60 Honduras 241–50
geothermal energy 21 background 241–3
Costa Rica 200 carbon brokers 246
Ecuador 217 challenges/opportunities 245–8
El Salvador 227 Designated National Authorities
Honduras 246 245
Mexico 256 financial barriers 76
technical barriers 50–1 hydro projects 44
Global Village Energy Partnership informational barriers 89, 93
(GVEP) 94 institutional barriers 102–3, 105–6
Gold Standard 9, 133–4 institutional support 245
Granada 300 legislation 243–4, 247–8
greenhouse gases 3–6, 7–9, 10, 16–17 portfolios 244–5
Colombia 190–1 privatization 241–3
development banks 92–3 renewable energy potential 246
financial barriers 81 vital statistics 241
methane conversion 51 human rights groups 69
methodological barriers 118–21 hurricane damage 44, 45
Mexico 251–2 hydrocarbons 8–9, 10, 16–17, 208–9
small-scale barriers 132–3, 135–6 hydrofluorocarbons (HFCs) 8–9, 10,
Guatemala 231–40 16–17
background 231–2 hydro projects 19–20
carbon brokers 235 Bolivia 165–6
challenges/opportunities 234–7 Brazil 169–70
Designated National Authorities Chile 178, 179, 180
234 Costa Rica 198–9, 200, 202, 203–4
geothermal projects 21 Ecuador 215, 217, 219–20
hydro projects 69 El Salvador 227
informational barriers 93 Guatemala 233, 236
institutional barriers 102–3, 105, Honduras 244, 246, 248
106 institutional barriers 103
institutional support 234–5 methodological barriers 112, 114–15
legislation 232–3, 235–6 Mexico 260, 262
portfolios 233 small-scale barriers 127–8, 130, 136
privatization 231–2 social barriers 68–9, 70–1
renewable energy potential 235 technical barriers 44–5, 47
small-scale barriers 137 wind project compatibility 47
social barriers 69
vital statistics 231 Iberdrola 118
wind energy 20 ICE see Instituto Costarricense de
Guyana 300 Electricidad
INDEX 343
illegal activity 65–6, 70, 192, 208, Instituto Nacional de Electrificación

213–14 (INDE) 231, 236
imported energy 113 Instituto Nacional de Technología
incentives Agropequaria (INTA) 154
biodigesters 60 Instituto Nacional de Tecnología
biomass projects 48 Industrial (INTI) 154
Bolivia 164–5 INTA see Instituto Nacional de
Brazil 170, 171, 172, 174–5 Technología Agropequaria
Dominican Republic 209 Interconnecíon Eléctrica S.A. 188
Ecuador 216 internal rates of return (IRRs) 78–9
El Salvador 224–5 INTI see Instituto Nacional de
methodological barriers 118–20 Tecnología Industrial
small-scale barriers 136–7 investors 14, 46, 75–8, 80, 235–6,
Incentives Programme for Alternative 319–28
Sources of Electric Energy (PROINFA) IPPs see independent power producers
103, 170, 171, 172, 174–5 IRRs see internal rates of return
INDE see Instituto Nacional de
Electrificación Jamaica 299
independent power producers (IPPs) Joint Implementation (JI) 200–1
Costa Rica 197–8 financial barriers 83
Dominican Republic 207–8 methodological barriers 110, 111
Honduras 246–7
institutional barriers 105–7 Kyoto Protocol 3, 5, 7–8, 9
methodological barriers 118
Mexico 252, 260–1, 262 La Babilonia 67, 248
industrial gas mitigation projects 8–11, LAFRE (Ley para el Aprovechamiento de
16–17, 110 las Fuentes Renovables de Energía)
Industrias Metalúrgicas Pescarmonia 253–5
S.A. 46 lagoons 54–5, 60
informational barriers 87–100, 322 landfill gas projects 22
institutional barriers 101–8 Chile 180
institutional support 149–50 Colombia 193
Argentina 154–5 El Salvador 227
Bolivia 164 methodological barriers 120, 122
Brazil 172–3 Mexico 256
Chile 181–2 social barriers 70
Colombia 190–1 technical barriers 51–3, 60
Costa Rica 201 see also methane capture
Dominican Republic 210 land ownership 66, 248
Ecuador 218 language barriers 83, 97, 98
El Salvador 226–7 least-cost planning 152, 259
Guatemala 234–5 legislation 149
Honduras 245 Argentina 153
informational barriers 87–97 Bolivia 162
Mexico 257 Brazil 170–1
Nicaragua 267 Chile 179
Panama 274 Colombia 188–9
Peru 283–4 Costa Rica 199, 203
Uruguay 292 Dominican Republic 208–9
Instituto Costarricense de Electricidad Ecuador 216
(ICE) 105, 106, 117 El Salvador 224–5
Guatemala 232–3, 235–6 microhydro projects 127–8, 130

Honduras 243–4, 247–8 mining 69, 236
institutional barriers 102–4 Momotombo 21, 51
Mexico 252–5 multilateral development banks 79–82
Nicaragua 266
Panama 272–3 N2O see nitrous oxide
Peru 281 national laboratories 94–5
regional trends 305–7, 309–12 National Renewable Energy Laboratory
small-scale barriers 136–7 (NREL) 94
social barriers 66 National Rural Electric Cooperative
Uruguay 290–1 Association (NRECA) 234–5
Letter of Approval processes 90 natural disasters 44, 45, 227
Ley para el Aprovechamiento de las natural gas 152, 178
Fuentes Renovables de Energía negative pressure digesters 56
(LAFRE) 253–5 NGOs see non-governmental
low emission factors 112–13 organizations
Nicaragua 265–70
mandates 118–20, 170, 171, 172, 174–5, background 265–6
309–11 carbon brokers 268
see also legislation challenges/opportunities 267–9
mandatory programmes 119 Designated National Authorities
market openness 105–7 267
merit order dispatch systems 183–4 financial barriers 76, 77
methane capture 22 geothermal projects 21, 50–1
Argentina 154 institutional barriers 102
informational barriers 96 institutional support 267
methodological barriers 116, 120 landfill gas projects 22, 70
Mexico 255–6 legislation 266
scavengers 70 portfolios 266–7
small-scale barriers 128, 135 privatization 265–6
technical barriers 51–61 renewable energy potential 268
methodological barriers 109–26 social barriers 70
Methodology panels 15 Verified Emission Reductions 134
Mexico 251–64 vital statistics 265
carbon brokers 257 nitrous oxide (N2O) 8–9, 10, 16–17
challenges/opportunities 256–62 node prices 179, 242–3, 246–7, 248
Designated National Authorities 256 non-Annex I countries 3, 10
financial barriers 76 non-governmental organizations
geothermal energy 21 (NGOs)
informational barriers 88, 89, 91, Brazil 173
94–5 Ecuador 219, 220
institutional support 257 Guatemala 236–7
legislation 252–5 industrial gas mitigation projects 9
methane capture 22, 54–61 informational barriers 93–4
methodological barriers 117–18, 120 social barriers 69
portfolios 255–6 non-harvest seasons 50
privatization 251–2 NRECA see National Rural Electric
renewable energy potential 257–8 Cooperative Association
social barriers 67 NREL see National Renewable Energy
vital statistics 251 Laboratory
wind projects 20, 46–7
INDEX 345
Oaxaca 46, 67, 118, 257–8, 259, 260–2 wind projects 46

OCIC see Climate Change Consultative perverse incentives 118–20
Committee petroleum 178
odour ordinance 59–60 pH 57
off-gassing requirements from landfills pilot lights 57, 58
51–2 PINs see Project Idea Notes
off-grid systems 199 PoA see The Programme of Activities
offset providers 134 political parties 104–5
off-takers 76 instability/stability 15, 16, 77–8, 165
Oficina Nacional de Promoción del task division 104
Mecanismo de Desarrollo Limpio portfolios 147, 149
(CORDELIM) 218 Argentina 153
open flares 116 Belize 160
open markets 106, 149 Bolivia 163
operating margins 113–14, 183–4 Brazil 171–2
ornithologist interference 46–7 Chile 180–1
Colombia 189
palm products 53, 245, 246 Costa Rica 200
Panama 271–8 Dominican Republic 209–10
background 271–2 Ecuador 217
carbon brokers 274 El Salvador 225–6
challenges/opportunities 274–6 Guatemala 233
Designated National Authorities 274 Honduras 244–5
institutional barriers 102–3 Mexico 255–6
institutional support 274 Nicaragua 266–7
legislation 272–3 Panama 274
methodological barriers 120 Peru 282
portfolios 274 Uruguay 291
privatization 271–2 positive pressure digesters 56
renewable energy potential 275 Power Purchase Agreements (PPAs) 102,
social barriers 71 148
vital statistics 271 Dominican Republic 207
Paraguay 298 Ecuador 214–15
Paramonga 112 financial barriers 76
Patagonia 46, 155 Guatemala 231–2
PCF see Prototype Carbon Fund Honduras 246–8
PDDs see Project Design Documents methodological barriers 118
penalties 82, 179, 200–1 Mexico 261
permitting procedures 46, 247–8 PPAs see Power Purchase Agreements
Peru 279–88 PRA see Blackout Reduction Programme
background 279–81 pressure digesters 56
carbon brokers 284 privatization 147–9
challenges/opportunities 282–5 Argentina 151–3
Designated National Authorities 282–3 Belize 159–60
informational barriers 88, 89, 90, 91 Bolivia 161–2, 166
institutional support 283–4 Brazil 169–70
legislation 281 Chile 177–8
portfolios 282 Colombia 187–8
privatization 279–81 Costa Rica 197–9, 202–3
renewable energy potential 284 Dominican Republic 207–8
vital statistics 279 Ecuador 213–15
El Salvador 223–4 Mexico 255

financial barriers 80 Nicaragua 267
Guatemala 231–2 Panama 274
Honduras 241–3 Peru 282
institutional barriers 106 small-scale barriers 131, 135
Mexico 251–2 Uruguay 291
Nicaragua 265–6 regulatory arms 153–4, 218
Panama 271–2 reservoirs 45
Peru 279–81 retroactive project registration 116
regional trends 303–4 revenues 4, 5
social barriers 69 financial barriers 78
Uruguay 289–90 informational barriers 97, 98
Production Tax Credits (PTCs) 120, 153, institutional barriers 106
310, 312 small-scale barriers 133, 134
The Programme of Activities (PoAs) 121, Río Azul 52, 53, 66, 70
130–1 Rio de Janeiro 10
PROINFA see Incentives Programme for Risø Centre 91–2, 98
Alternative Sources of Electric run-of-river projects 45, 71
Energy rural populations 130–1, 147, 162, 171,
Project Design Documents (PDDs) 4, 234–5
11–12, 14–15, 17, 149
methodological barriers 112, 121 St. Lucia 300
small-scale barriers 129–30 Sandía National Lab 95
project developers 14, 319–20 San Jacinto 21, 50
communication 58 SECCI see Sustainable Energy and
Costa Rica 202–3 Climate Change Initiative
financial barriers 78–9, 82, 83 secondary CER markets 7
methodological barriers 113, 116 security 66, 75
Project Idea Notes (PINs) 11, 14–15 self supply schemes 253
promotional arms 153, 154 SIFER see System for the Promotion of
Prototype Carbon Fund (PCF) 79–80, 92 Renewable Energies in Small-Scale
PTCs see Production Tax Credits Projects
SIN see Central National Grid
refinancing schemes 83 slaughterhouses 60, 255–6
regional analyses 18–19 small-scale barriers 13, 127–44, 322,
regional offices 234–5 325–6
regional organizations 94, 95–6 social barriers 65–74, 319–20, 323
regional trends 303–16 solar energy 57, 130, 227, 246
registration 4–5, 12, 15, 116, 149 stakeholders 236–7
Argentina 154 state-run entities 105–7, 117–18, 148–9
Bolivia 162 geothermal projects 21
Brazil 171 Guatemala 231, 236
Chile 180 Honduras 241–3, 246–7, 248
Colombia 189 methodological barriers 117–18
Costa Rica 200 Mexico 251, 252, 254–5
Dominican Republic 209 wind energy 20
Ecuador 217 steam extraction 50–1
El Salvador 225 step-down transformers 67
Guatemala 233 Strategic Climate Fund 81, 93
Honduras 244 support networks
methodological barriers 116 Argentina 154–5
INDEX 347
Bolivia 164 UNDP see United Nations Development

Brazil 172–3 Program
Chile 181–2 UNEP see United Nations Environment
Colombia 190–1 Programme
Costa Rica 201 UNFCCC see United Nations
country-specific profiles 149–50 Framework Convention on Climate
Dominican Republic 210 Change
Ecuador 218 Unidad de Pleanación Minerio
El Salvador 226–7 Enérgetica (UPME) 191
Guatemala 234–5 United Nations Development Programme
Honduras 245 (UNDP), informational barriers 91
informational barriers 87–97 United Nations Environment Programme
Mexico 257 (UNEP), informational barriers
Nicaragua 267 91–2, 98
Panama 274 United Nations Framework Convention
Peru 283–4 on Climate Change (UNFCCC) 3–5,
Uruguay 292 8–10, 11–12, 14–15, 17, 323–6
Suriname 300 financial barriers 78
sustainable development 9–10, 11, 12, 15 procedural 109–26
informational barriers 88, 89–90, small-scale barriers 135
92–3, 95–6 United Nations (UN) 91–2
institutional barriers 105 university contributions 71–2, 96
Sustainable Energy and Climate Change UPME see Unidad de Pleanación Minerio
Initiative (SECCI) 92–3 Enérgetica
System for the Promotion of Renewable Uruguay 289–96
Energies in Small-Scale Projects background 289–90
(SIFER) 225 carbon brokers 292
challenges/opportunities 291–4
tariffs 170, 188, 199, 216, 310–11, 312 Designated National Authorities
taxation 310, 312 291–2
Argentina 153 financial barriers 82
Bolivia 164 informational barriers 88–9
Colombia 188–9 institutional barriers 103
Dominican Republic 208–9 institutional support 292
El Salvador 224–5 legislation 290–1
Honduras 243 portfolios 291
informational barriers 91 privatization 289–90
institutional barriers 102–3 renewable energy potential 292
methodological barriers 120 vital statistics 289
small-scale barriers 136, 138 wind projects 46–7
technical barriers 43–64, 319, 323 ‘use it or lose it’ policy 47
temperature 56–7, 115, 116, 227, 246
thermal generation 115, 227, 246 validation processes 12, 14, 15, 149
Tobago 300 Argentina 154
Trinidad 300 Bolivia 162
turbines 20–1, 43–4, 45, 46–7, 48, Brazil 171
180–1 Chile 180
turbo-generators 51 Colombia 189
Costa Rica 200
UN see United Nations Dominican Republic 209
unbundling projects 128 Ecuador 217
El Salvador 225 Guatemala 233

Guatemala 233 institutional barriers 104
Honduras 244 methodological barriers 114, 115
informational barriers 89–90 social barriers 68
Mexico 255 valuation 114, 115, 183
Nicaragua 267 wholesale electricity markets 76
Panama 274 wind energy 20–1
Peru 282 Argentina 155
small-scale barriers 131 Chile 180
Uruguay 291 Costa Rica 200
VCS see Voluntary Carbon Standard Dominican Republic 210
Venezuela 297–8 El Salvador 227
verification processes 12, 14, 131 Honduras 246, 247
Verified Emission Reductions (VERs) institutional barriers 103
93–4, 133–5, 202 methodological barriers 117, 118
Voluntary Carbon Standard (VCS) 134 Mexico 256, 257–8, 259–60, 261–2
Voluntary Emission Reductions (VERs) small-scale barriers 132–3
see Verified Emission Reductions technical barriers 46–8
voluntary programmes 119 Winrock International 94–5
the World Bank 259–60
waste see hog farms financial barriers 79–81
watch groups 9, 15 informational barriers 92
water 53–4 methodological barriers 109–10
biodigester location 57
Costa Rica 199 Zámbiza dump 52
Ecuador 220 Zambizá landfill gas site 122
effluent fines 59

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List of Figures and Tables v

Section 1 CDM Market and this Guide

Chapter 3 Social Barriers 65

Chapter 4 Financial Barriers 75

Chapter 5 Informational Barriers 87

Chapter 6 Host Country Institutional Barriers 101

Chapter 7 UNFCCC Procedural and Methodological Barriers 109

Chapter 8 Small-Scale Barriers 127

Section 3 Country Market Intelligence for CDM Projects

Chapter 10 Argentina 151

Chapter 11 Belize 159

Chapter 12 Bolivia 161

Chapter 13 Brazil 169

Chapter 14 Chile 177

Chapter 15 Colombia 187

Chapter 16 Costa Rica 197

Chapter 17 Dominican Republic 207

Chapter 18 Ecuador 213

Chapter 19 El Salvador 223

Chapter 20 Guatemala 231

Chapter 21 Honduras 241

Chapter 22 Mexico 251

Chapter 23 Nicaragua 265

Chapter 24 Panama 271

Chapter 25 Peru 279

Chapter 26 Uruguay 289

Chapter 27 Other Latin American Countries 297

Chapter 28 Regional Trends 303

Section 4 Future Development

Chapter 30 Summary of CDM Barriers 329

that helped me have successful interviews. Manuel Estrada, a private CDM

The Clean Development Mechanism (CDM) allows Annex I countries that

mandate, then its regulatory additionality is put in question. Likewise, if a

AAU Assigned Amount Unit

OECD Organisation for Economic Co-operation and Development

or substituting fossil fuel-based energy with renewable energy. If the CDM

nents in order to provide a thorough analysis of the barriers to CDM project

Clean Development Mechanism market

Industrial gas project impact

Figure 1.1 CER distribution by project type

Perhaps because of the questionable sustainable development benefits of

Figure 1.2 CDM projects registered by type

Overview of CDM project cycle

either be proven on financial grounds or through a barrier analysis, which

Step in cycle $2–8000 Responsible entity

$25–38,000 Project developer or

Figure 1.3 CDM project cycle

Small-scale renewable energy projects, defined by the UNFCCC as those

Investors’ and project developer’s steps

9 Be in contact with DOE that verifies emission reductions to be aware of

Current CDM landscape

Figure 1.4 Global distribution of CDM projects

Figure 1.5 Global distribution of CERs

Figure 1.6 Distribution of CERs by country in Latin America

Figure 1.7 Distribution of CERs generated by 2012 by type in Latin America

Figure 1.8 CERs derived from various renewable energy projects

Figure 1.9 CDM renewable energy project distribution in Latin America

Project type analysis

of generation. Estimated potential hydro resources are enormous because of

studying geothermal prospects in Colombia [70] and the Ministry of Energy

Other methane capture

Table 1.1 Renewable energy CDM projects registered or in the